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Building Bridges 
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SUBCOMMITTEE ON 

ENVIRONMENTAL 

TECHNOLOGY 


National Advisory 
Council for Environmental 
Policy and Technology (NACEPT) 


























The National Advisory Council for Environmental Policy and Technology (NACEPT) is an in¬ 
dependent federal advisory committee that provides recommendations to the Administrator of 
the U.S. Environmental Protection Agency (EPA) on a broad range of environmental issues. 
This report has not been reviewed for approval by the Agency, and hence, the contents of this 
report do not necessarily represent the views and policies of the EPA, nor of other agencies 
in the Executive Branch of the Federal Government, nor does mention of trade names or 
commercial products constitute a recommendation for use. Reports of NACEPT are posted 
on the EPA Web Site at http://www.epa.gov/ocem/nacept. 


EPA/600/R-08/043 

U.S. Environmental Protection Agency 
Office of Cooperative Environmental Management 
http://www.epa.gov/ocem 
April 2008 



EPA and the Venture Capital 
Community: Building Bridges 

ialize Technology 


isory Council for Environmental 
d Technology (NACEPT) 





33 ? 


SUBCOMMITTEE ON ENVIRONMENTAL 
TECHNOLOGY 


Subcommittee Members 

Philip Helgerson (Chair) - Computer Sciences Corporation 

Dan Watts (Liaison to the NACEPT Council) - New Jersey Institute of Technology 

Linda Benevides - Massachusetts Department of Environmental Protection 

David Dzombak - Carnegie Mellon University 

Kenneth Geiser - University of Massachusetts at Lowell 

John Hornback - Metro 4, Inc. and Southeastern States Air Resource Managers, Inc. 

Kristine Krause - Wisconsin Energy Corporation 

JoAnn Slama Lighty - University of Utah 

Raymond Lizotte - American Power Conversion Corporation 

Oliver Murphy - Lynntech, Inc. 

Robin Newmark - Lawrence Livermore National Laboratory 
Patrick O'Hara - Cummings/Riter Consultants 
Christine Owen - Tampa Bay Water 

Katherine Reed - 3M Environmental, Health and Safety Operations 
Norman Richards - First People's Environmental, LLC 
Karen Riggs - Battelle Memorial Institute 

Howard Roitman - Colorado Department of Public Health and Environment 
Kent Udell - University of Utah 




Chairman’s Prologue 





In this third report of the Subcommittee on Environmental Technology, we 
offer our most challenging—but most promising—recommendations. 

In our second report, we recommended that the U.S. Environmental 
Protection Agency (EPA) work with the private sector to find ways to increase 
investment in the commercialization of environmental technologies. For this 
study, we went to the investment community to discover what they think EPA 
should do to stimulate the development and commercialization of technologies 
essential for addressing today's environmental challenges. In this third report, we 
offer recommendations for both EPA and the investment community. 


Stimulating private-sector investment in new technologies is among the most 
important initiatives EPA can undertake particularly with ongoing budget con¬ 
straints. The global need for solutions exceeds the fiscal capacity of any govern¬ 
ment, and the commercial market may be able to mobilize and invest immense 
resources of private capital to develop and diffuse technologies rapidly. 


Not long ago, the United States unquestionably dominated the marketplace 
of new environmental ideas and technology solutions as our nation recognized 
and addressed threats to health and the environment and vowed to address 
them through regulations and new technology. EPA embarked on impressive 
research and development programs—opening laboratories, funding university 
research, and conducting pilot programs and demonstration programs. 
Responding to the immediacy of EPA's vision of a cleaner, safer, healthier world, 
students flocked to universities to study environmental science and to participate 
in EPA-funded research. As we observed in our previous reports, that era has 
passed. Since then, EPA has been forced to reduce or discontinue many suc¬ 
cessful programs that produced significant environmental improvements, and as 
a result, our nation has lost some of its technical excellence and environmental 
leadership. 

It is time for EPA to restore its powerful vision of a clean and healthy world, by 
declaring an even more energetic and visionary commitment to technology dis¬ 
covery and verification, and the commercialization of innovative approaches to 
address threats to health and the environment. Such a commitment is essential 
to solve the enormous environmental challenges posed by climate change, 
releases of carbon dioxide and greenhouse gases, the impacts of diminishing 
resources, nanotechnology and new products, and other issues. 

On the positive side, there has never been a better time to act! The global 
community is increasingly aware of environmental risks and the interconnected¬ 
ness of our world. Global commerce places companies in many locations 
around the world and people experience the world more than ever through the 
media and extensive personal travel. Science is providing explanations of the 
risks that threaten natural resources, sources of energy and food, human health, 
economics, and our quality of life. 

These challenges call for technological solutions on a scale that requires 
enormous capital investment. The capital must come from private businesses, 
individuals, and public institutions with the vision and confidence that technology 
solutions can succeed. We learned from the investment community that there is 






a large amount of capital to be invested in environmental technologies, but the 
returns on these investments must be comparable to other investment options. 

To unleash the power of their capital, EPA must ensure predictability and certain¬ 
ty with regard to regulations and enforcement, and dedicate the Agency and its 
state partners to streamlined permitting. The investment community is impeded 
not only by EPA regulations, but also by EPA inaction. Indeed, the investors inter¬ 
viewed in this study voiced agreement that uncertainty and the lack of a pre¬ 
dictable regulatory framework for carbon dioxide emissions, for example, is 
retarding investment in these technologies. 

It is important to note that the investors do not seek relaxation of regulations, 
but rather a predictable and consistent regulatory framework that helps define 
the market and reduce risks of uncertainty. Investors are looking to EPA to consis¬ 
tently enforce regulations to ensure a "level playing field" for all participating 
companies. After a technology is demonstrated, investors seek a streamlined 
permitting process that allows prompt market entry. EPA can work collaborative- 
ly with states and regional offices to streamline the permitting process for these 
new technologies. The Agency also can help reduce risks by providing objective 
technology verifications. All of these actions by EPA will help stimulate new invest¬ 
ment by reducing risks. 

Investment in the clean energy sector is strong because future market 
demand is apparent. Energy and environmental technologies often are related, 
so many new technologies in the clean energy market sector have significant 
environmental components. For example, technologies that bridge energy and 
environmental sectors often address challenges related to climate change and 
diminishing natural resources that threaten human health and the environment. 

It is logical for EPA to partner with other agencies such as the Department of 
Energy and seek ways to collaboratively support investment in mutually benefi¬ 
cial technologies. 

EPA should initiate better communications with the investment community to 
promote understanding and mutually beneficial relationships. This is not a simple 
task. Maintaining a dialogue with the investment community will require funda¬ 
mental cultural changes at all levels within the Agency, and a clear vision for 
EPA's role in encouraging environmental technology investments. Our study 
found that EPA has not been perceived by the venture capital community as 
open to or interested in such a dialogue. The investment community believes 
that a constructive dialogue will change that misperception, if it is accompanied 
by the actions we recommend to EPA. 

Investors indicated their willingness to pursue an ongoing dialogue with EPA, 
and emphasized the need to act now. EPA's interest in initiating such a dialogue 
conveys an encouraging message. The Agency already has taken important ini¬ 
tial steps toward establishing this useful dialogue by appointing a Senior 
Environmental Technology Officer and establishing Environmental Technology 
Advocates in each EPA regional office to serve as Agency points of contact, but 
the vision must be defined and embraced by the EPA Administrator. 

We urge EPA to build on this new foundation and capitalize on its scientific 
and technical credibility by acting promptly on the recommendations in our 


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report. A visionary goal to preserve human health and the environment for the 
planet in which we live warrants a sustained commitment to stimulate investment 
in new technology that rivals the race to space! Acting now is essential to create 
a new legacy of effective environmental technology solutions. 

Philip Helgerson, Chairman 

Subcommittee on Environmental Technology 

National Advisory Council for Environmental Policy and Technology 






Table of Contents 


I. Executive Summary. 



Introduction - Work Group and Study Approach.5 


A. Origin and Purpose of the Study. 5 

B. The Study Work Group.6 

C. Study Approach . 7 

D. Venture Capital Community Interviewees. 8 

E. Interview Process. 9 

A. Definitions.11 

B. Trends in Venture Capital Funding.13 

C. Environmental Technology Investment Market.13 

D. Opportunities for Increasing Investments in Environmental and 

Clean Technologies. 15 

E. Stages of Investment.17 


IV. Findings from the Interviews with the Venture Capital Community ..19 


A. Drivers of Environmental Technology Investment.19 

B. Regulatory Context. 24 

C. EPA Role in Technology Development and Commercialization. 28 

D. Future EPA Interactions with the Investment Community. 34 

E. Actions of Venture Capital Firms to Help EPA Encourage Environmental 

Technology Development and Demonstration . 41 

A. Recommendations for EPA. 46 

B. Recommendations for the Venture Capital Community . 49 


Appendices.51 


Appendix A: Venture Capital Work Group Members. 51 

Appendix B: Charge to the Work Group. 53 

Appendix C: Venture Capital Community Interviewees. 55 

Appendix D: Pre-Interview Instrument. 60 

Appendix E: Open-Ended Questions and Sub-Questions.66 

Appendix F: Summary of Pre-Interview Question Responses .68 

Appendix G: Examples of Successful Investments from the 

Venture Capital Community. 73 

Appendix H: Understanding the Environmental Impact of Clean Energy 

and Other Technology Investments: Environmental Capital 

Group’s Environmental Due Diligence Process. 82 

Appendix I: List of Acronyms. 87 

Appendix J: References.88 


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Table and Figure 


Table 1. Environmental Industry Sector Growth 1990-2000 and 2000-2010 .15 

Figure 1. Plot of Market Size vs. Market Growth of Environmental 
Market Segments.17 


Text Boxes 


Venture Capital Study Work Group Members.7 

Venture Capital Study Interviewees.. 8 

The Ten Open-Ended Questions Used in the Interviews with 

Venture Capitalists . 10 

Clean Energy Trends 2008 Report.18 


Projects for Venture Capitalists and EPA to Emulate 


“Funding New Environmental Technology That Holds Promise for a 

Cleaner Environment”.16 

“Environmental Due Diligence Process Used by CalPERS”.21 

“Pension Fund Investing in Environmental Technology”.30 

“Technology Verification Validates Innovative Environmental 

Technology Claims” .31 

“Using Government Grants to Augment Venture Capital Investment in 

Clean Technology”.32 

“Government Outreach to Venture Capital Community”.33 

“Technology ‘Spinouts’ from Government Laboratories” . 35 

“Regional Mechanism for Bringing Together Venture Capitalists, Industry, 
Academia, and Government to Accelerate the Region’s Clean 

Energy Economy”.36 

“National Mechanism for Bringing Business, Capital Markets, and 
Environmentalists Together to Help Corporate Governance Address 

Climate Change” .37 

“Utilizing CRADAs to Demonstrate and Commercialize Innovative 

Technologies” .40 

“Government Partnering with Venture Capitalists to Commercialize 
Technology from Federal Laboratories”.41 


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Venture capital investors report that there is a growing interest in environmen¬ 
tal technologies, spurred by awareness of global issues such as climate change, 
as well as the diminishing sources, high costs, and environmental consequences 
of carbon-based energy, and the increasing costs and decreasing availability of 
other essential resources such as clean water. 

Significant investments are being made by the venture capital community in 
clean energy-related technologies, including "cross-over" technologies that yield 
both energy and environmental benefits. Although the growth potential for most 
environmental sectors is expected to continue to rise through 2010, the most sub¬ 
stantial growth is expected in the clean energy sector. Investors have indicated 
that there is a vast amount of capital available for investing in promising environ¬ 
mental technologies and many individual and institutional investors are seeking 
opportunities to invest in the growing environmental technology sector. Returns 
on these investments, however, still must compete with other investment options. 
Therefore, it is critical to investors that areas of investment risk—often based on 
regulatory uncertainty and unpredictability—be identified and reduced. 

Horizons for investment contemplate long-term potential for the technology, 
and a predictable forecast of the regulatory environment is essential to reduce 
uncertainty. Moreover, the new challenges that will be solved by emerging tech¬ 
nologies often require a new regulatory framework. Delays in establishing that 
regulatory framework impede investment in new technology by perpetuating the 
risk of an uncertain, unpredictable market. 

For these reasons, effective stimulation and adoption of new technology 
requires timely regulatory action. EPA must act promptly to accelerate its 
engagement with new technology developers and investors, and commit to a 
credible, long-term advocacy of new technology. This includes not just clear, 
timely regulations and predictable, consistent enforcement, but also an institu¬ 
tional culture that advocates new technology and stimulates constructive inter¬ 
action and communication among EPA, technology investors, technology devel¬ 
opers, and users. 

Findings and Recommendations ■ 

Major Findings 

Based on the nine interviews conducted and the experiences of the Work 
Group members, the major findings of the study follow: 

1. The existence of regulations many times stimulates technology investment 
and the lack of regulations can sometimes retard technology investment. 


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Therefore, regulation of carbon and climate change-related pollutants is 
needed to advance investment in new technologies to address climate 
change issues. 

2. The early-stage venture capital community is interested in having direct, 
routine communications with EPA managers and staff (e.g., the Senior 
Environmental Technology Officer (SETO) and Regional Technology 
Advocates (RTAs)) and technology developers on environmental technol¬ 
ogy issues of mutual interest. 

3. As became evident when EPA's programs were organized along the con¬ 
tinuum developed in the first Subcommittee report, EPA has few programs 
that focus on the commercialization stage. This stage is critical because 
many technologies are not commercialized when they cannot bridge the 
"Valley of Death" (i.e., the particularly challenging period from prototype 
and proof of concept to the critical later stages of development and prof¬ 
itable revenues). 

4. The role of the regulatory community is important in clean technology 
development and commercialization. Early-stage investors are looking for 
a minimum of 3 to 5 years of certainty regarding investments contingent 
on governmental influences. Next-stage investors provide capitalization for 
taking these new clean technologies to commercial scale. During this 
commercialization phase, streamlined permitting and consistent enforce¬ 
ment become increasingly important. 

5. Investors expect that regulatory requirements will be aggressively enforced 
so that a "level playing field" for all participating companies will exist. 

6. Although venture capitalists have invested in clean technology compa¬ 
nies, investors are concerned that there currently is no system or metrics to 
monitor these technologies to determine if they are "cleaner" than exist¬ 
ing alternatives. 

7. EPA credibility is high in the investment community. EPA certifications are 
recognized internationally and can influence a technology's commercial¬ 
ization potential. 

Key Recommendations for EPA 

The Subcommittee urges EPA to consider the following six recommendations: 

1. Recognize carbon dioxide, greenhouse gases, and climate change-relat¬ 
ed pollutants as pollutants that are addressed in Goal 1 of EPA’s Strategic 
Plan (Clean Air and Global Climate Change 1) and take priority measures 
within EPA’s authority to establish standards and long-term regulations for 
these pollutants. 

2. Forge and sustain communications with the early-stage investment com¬ 
munity. 


'"Protect and improve the air so It is healthy to breathe and risks to human health and the environment are reduced. 
Reduce greenhouse gas intensity by enhancing partnerships with business and other sectors." Goal 1. Clean Air and 
Global Climate Change. U.S. Environmental Protection Agency. 2006-2011 Strategic Plan: Charting Our Course. EPA- 
190-R-06-001. Washington, DC, 2006. Available at http://www.epa.gov/ocfo/plan/plan.htm. 







3. Strengthen financial support (e.g., loan guarantees, grants, revolving loan 
funds) and reduce regulatory risks for new technology development dur¬ 
ing the commercialization period. 


4. ake steps to streamline permitting for commercial scale-up of new, inno¬ 
vative environmental technologies. 

5. Enforce environmental regulations consistently to clarify needs and avoid 
uncertainty. 

6. Support metrics and monitoring of new technologies. 


Key Recommendations for the Venture Capital Community 

The venture capital community also should take actions to promote EPA's 
involvement in the environmental technology sector. The Subcommittee encour¬ 
ages early-stage environmental technology investors to consider the following 
four recommendations: 

1. Collaborate with EPA to establish metrics and monitoring strategies for new 
technologies to measure and document demonstrated actual perform¬ 
ance of these technologies. 

2. Participate in environmental technology verification programs and EPA- 
supported metrics and monitoring programs. 

3. Encourage communication and interaction among technology develop¬ 
ers, investors, and EPA. 

4. Provide opportunities for EPA to financially support promising new environ¬ 
mental technologies through existing and new financial support programs. 

More detail on these recommendations is presented in Chapter V: Next 
Steps—Workgroup Recommendations, which also includes additional recommen¬ 
dations to further EPA's objectives of stimulating development and commercial¬ 
ization of environmental technologies to protect human health and the environ¬ 
ment. 


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This report is the third report in a series of reports prepared since May 2006 by 
the Subcommittee on Environmental Technology of the National Advisory Council 
for Environmental Policy and Technology (NACEPT). The purpose of these reports 
is to improve the effectiveness of the U.S. Environmental Protection Agency (EPA) 
at stimulating the development of environmental technologies to achieve the 
objectives of protecting human health and the environment. 

In its first report, EPA Technology Programs and Intra-Agency Coordination 
(May 2006), the Subcommittee presented the "EPA Environmental Research and 
Development Continuum" as a perspective from which the Agency could view 
its role in the creation and diffusion of new technologies. In a second report, EPA 
Technology Programs: Engaging the Marketplace (May 2007), the 
Subcommittee described a recommended external focus for EPA initiatives to be 
addressed by the Senior Environmental Technology Officer (SETO) and Regional 
Technology Advocates, and identified the need for EPA to strategically partner 
with other organizations to develop and commercialize environmental technolo¬ 
gies. 

This report, EPA and the Venture Capital Community: Building Bridges to 
Commercialize Technology, summarizes the assessments and recommendations 
of nine leading representatives from the investment community who routinely 
review and engage in investment opportunities targeting early-stage environ¬ 
mental technologies. Together, they represent a valuable perspective on some 
key trends that dominate this investment market. 

Without exception, the investors share confidence about the current and 
future business opportunities in the environmental technology market. They have 
shared their candid assessments about ways EPA influences those opportunities. 
They also have offered suggestions about steps the Agency can undertake to 
remove barriers, stimulate technology development, and increase the introduc¬ 
tion of new technologies to address persistent and emerging environmental chal¬ 
lenges. 

A. Origin and Purpose of the Study 

In October 2004, U.S. Environmental Protection Agency (EPA) Administrator 
Michael Leavitt asked the National Advisory Council for Environmental Policy and 
Technology (NACEPT) to investigate two questions: 

■ How can EPA better optimize its environmental technology programs to 
make them more effective? 

■ What other programs should the Agency undertake to achieve this goal? 


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NACEPT formed the Subcommittee on Environmental Technology to address 
this charge and the Subcommittee held its first meeting in November 2004. Since 
then, NACEPT has endorsed and forwarded to the EPA Administrator two reports 
by the Subcommittee on Environmental Technology, which are both available on 
the Web at http://www.epa.gov/etop. 

In the first report, EPA Technology Programs and Intra-Agency Coordination, 
the Subcommittee presented the "EPA Environmental Research and 
Development Continuum" as a perspective from which the Agency could view 
its role in the creation and diffusion of new technologies. Placing EPA technology 
development programs on the continuum illustrates that EPA has offered limited 
programs to support the development of technology during the challenging 
commercialization phase. As a result, environmental technologies developed by 
EPA and by others with and without EPA support have largely relied on funding 
from the private sector to be commercialized and used to protect public health 
and the environment. The report challenged EPA to adopt a more significant role 
in technology development as a fundamental part of its activities, and to seek a 
balance approach that fulfills the need for participation at all stages in the 
development continuum, with particular emphasis on the gaps in the commer¬ 
cialization phase. 

In its second report, EPA Technology Programs: Engaging the Marketplace, 
the Subcommittee described a recommended external focus for EPA initiatives to 
be addressed by the Senior Environmental Technology Officer (SETO) and 
Regional Technology Advocates, and identified the need for EPA to strategically 
partner with other organizations to develop and commercialize environmental 
technologies. Recommended strategic partnerships would provide opportunities 
for EPA to stimulate and support increased investment in the commercialization 
of environmental technologies and build upon the Agency's internationally rec¬ 
ognized scientific and technical expertise. 

While actively implementing recommendations in the first two reports, EPA's 
Office of Research and Development requested that NACEPT direct the 
Subcommittee to extend its efforts by engaging with the investment community 
and seeking advice on actions that EPA and the investment community could 
take, and partnerships that the Agency and the investment community could 
create, to stimulate greater private sector investment for commercialization of 
environmental technologies over the long-term. 

A fitting sequel to its first and second reports, this third effort explores critical 
components of the early stage investment process, including current investment 
practices and trends; discusses positive and negative influences of EPA in invest¬ 
ment opportunities and decisions from the perspective of those in the investment 
business; and offers suggestions to remove or overcome barriers and critical gaps 
and create productive relationships leading to increased investment and com¬ 
mercialization of environmental technology. 



B. The Study Work Group 


To address this charge, the Subcommittee formed a focused Venture Capital 
Work Group. The members of the Work Group are listed in Appendix A and the 
Charge to the Work Group is provided in Appendix B. The Work Group was 


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asked to conduct a study and prepare a report to be reviewed and approved 
by the Subcommittee for submission to the NACEPT Council and subsequent 
transmission to the EPA Administrator. 

To design an approach to engage with the investment community, the 
Subcommittee invited five highly regarded professionals familiar with early-stage 
technology investment to join with an equal number of members of the 
Subcommittee on Environmental Technology to form the Venture Capital Work 
Group. The Work Group members, listed in the text box on this page, identified 
and recruited potential interviewees from the venture capital community, partici¬ 
pated in the interviews, formulated the findings and recommendations in this 
report, and offered insights from their own experiences with the environmental 
technology investment community. 

C. Study Approach 

The overall approach for the Venture Capital Study was to compile and 
review reports and other information about venture capital investment in environ¬ 
mental technology and to conduct interviews of nine members of the venture 
capital community whose investments include a clear focus on early-stage envi¬ 
ronmental technologies. 

The Work Group members considered EPA's draft Venture Capital Support for 
Environmental Technology: A Resource Guide (this document was prepared to 
provide EPA staff an overview of venture capital investment in environmental 
technology) and other sources of information on investment in environmental 
technology to develop contextual and background information for this report 
(see the reference list in Appendix J). The combined financial, technical, and 
investment experience of the members enabled the Work Group to identify lead- 


Venture Capital Study Work Group Members 


Phil Helgerson*, Work Group Chair, Computer Sciences Corporation 

John Hornback*, Executive Director-Metro 4, Inc. and Southeastern 
States Air Resource Managers, Inc. 

Robin Newmark*, Director-External Relations Global Security Principal 
Directorate, Lawrence Livermore National Laboratory 

Karen Riggs*, Battelle Memorial Institute 

Daniel Watts*, Liaison to NACEPT, Executive Director Otto H. York 
Center for Environmental Engineering & Science-New Jersey Institute 
of Technology 

Andrew dePass, Managing Director and Head of Sustainable 
Development Investments for Citi Alternative Investments 

Bryan Martel, Managing Partner-Environmental Capital Group LLC 

Frank McGrew, Managing Director-Morgan Joseph & Company, Inc. 

John Preston, Senior Lecturer-Massachusetts Institute of Technology 
Entrepreneurship Center 

John Wise, Liaison from the EPA Environmental Financial Advisory 
Board (EFAB) 

* NACEPT Subcommittee on Environmental Technology Member 


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ers in the environmental technology investment community for the interviews. In 
addition to being leaders in the venture capital community, a number of the 
interviewees had substantial knowledge of and experience with EPA and its tech¬ 
nology programs, making them particularly qualified to participate in this study. 

The Work Group designed a comprehensive interview approach, described 
in more detail in Section E. Interview Process, which posed meaningful questions 
to the interviewees that evoked thoughtful observations, advice, and recommen¬ 
dations for EPA and the venture capital community. The Work Group members 
reviewed the background materials and analyzed the interview discussions to 
develop the findings and recommendations presented in this report. 

D. Venture Capital Community Interviewees 


The Work Group thoughtfully selected nine leading venture capital investors 
and advisors whose collective investments make up a substantial portion of the 
venture capital investment in environmental technology, particularly early-stage 
investment. Without exception, these individuals are recognized, influential lead¬ 
ers in the environmental investment community. Together, the portfolios of the 
firms represented by the individuals selected for interviews total more than $3 bil¬ 
lion. The investment community leaders who volunteered to share their perspec¬ 
tives and suggestions as part of this study are identified in the text box below. 


Venture Capital Study Interviewees 


Rob Day, Principal-@Ventures 

John DeVlllars, Founder and Partner-BlueWave Strategies 

Hank Habicht, Managing Partner-SAIL Venture Partners 

Winston Hickox, Partner-California Strategies 

Kef Kasdin, General Partner-Battelle Ventures 

Eric McAfee, Managing Director-Cagan McAfee Capital Partners 

Chuck McDermott, General Partner-RockPort Capital Partners 

William Reilly, Founding Partner-Aqua International Partners/ 

Texas Pacific Group 

Rosemary Ripley, Member-NGEN Partners 


Not surprisingly, several of the leading environmental technology investors 
gained their specialized awareness of the technical and regulatory aspects of 
environmental technology opportunities through significant roles in the environ¬ 
mental regulatory community. Some served in public positions, including a for¬ 
mer EPA Administrator, a former EPA Deputy Administrator, a former EPA Regional 
Administrator, and a former Secretary of California's Environmental Protection 
Agency. As a result, the interviews reflect a strong awareness of EPA's past and 
present policies, procedures, and programs. Biographies of the interviewees are 
provided in Appendix C. 

Chapter IV: Findings from the Interviews with the Venture Capital Community, 
presents the ideas, concerns, and suggestions offered by these venture capital 
community representatives, but to ensure an open dialogue in the interviews the 
report does not attribute specific comments to any of the interviewees. 


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E. Interview Process 


The Work Group identified a list of potential interviewees and selected nine 
highly qualified representatives of the venture capital community based on the 
following criteria: 

■ EPA-Related Experience 

■ Portfolio includes environmental technology investments. 

■ Evidence of actively seeking environmental technology investments 
(e.g., attending and speaking at environmental conferences) 

■ Portfolio of environmental technologies is not limited to energy-related 
technologies (renewables, sustainable). 

■ Level of sophistication about markets (does not just follow others 
investing in the latest "hot topic"). 

■ Investment Experience 

■ Experience with traditional (or new) environmental technology and 
not just energy technology. 

■ Experience with early stage investment. 

■ Experience with seed/first round funding. 

■ Minimum of 5 years of experience as a senior venture capitalist. 

■ Experience managing funds of $20 million to $200 million. 

■ Experience managing funds other than hedge funds. 

The Work Group decided to focus on early stage investors and not to include 
institutional or social investors. In addition, the Work Group agreed to consider 
angel investors only if they are bringing opportunities to first-round investors. 

Twenty-one venture capitalists were identified and considered by the Work 
Group. The list was narrowed to 13 of the most qualified individuals based on the 
selection criteria. These 13 potential interviewees were contacted to determine 
their willingness and availability to be interviewed. Although everyone contact¬ 
ed about participating in the study indicated their interest in the topic, some 
were not available for an interview during the short timeframe in which they were 
to be conducted. Nine of the individuals contacted confirmed that they were 
willing and available to participate in the study interviews and the telephone 
interviews were scheduled for the month of February. 

The Work Group designed a Pre-Interview Instrument, provided in Appendix D, 
which was sent by e-mail to the interviewees 1 to 3 days before the interview. The 
interviewees were asked to complete the pre-interview instrument rating ques¬ 
tions and submit them to the Work Group prior to the interview. This allowed the 
Work Group time to tailor the open-ended questions posed during the interview 
and to probe deeper on specific areas of interest. 

The Pre-Interview Instrument described the background and purpose of the 
study as well as the process for the interview, and provided instructions on com¬ 
pleting and returning the instrument to the Work Group. The Pre-Interview 
Instrument was divided into four parts: (1) Current Investment Practices, (2) 

Future Investment Outlook, (3) EPA Activities, and (4) Open-Ended Questions. The 
interviewee was instructed to complete and return the first three sections prior to 
the interview, which involved assigning ratings. The 10 open-ended questions (see 


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text box on page 10) were provided prior to the interview to give the interviewee 
an idea of the types of questions that would be posed during the telephone 
interview. 

The Work Group conducted all nine interviews during February 2008. The 
interviews consisted of discussion of the rating responses from the Pre-Interview 
Instrument and the 10 open-ended questions and sub-questions, tailored some¬ 
what to each interviewee. These questions are provided in Appendix E. 

As expected, a range of responses to the pre-interview questionnaire provid¬ 
ed a stimulating background for the open-ended questions which were dis¬ 
cussed during interviews. The range of rating responses to the questions posed in 
the Pre-Interview Instrument is illustrated in Appendix F. Interviewees also were 
asked to provide examples of successful environmental technology investments 
during the interviews and these are referred to throughout this report and 
described in Appendix G. 

The Work Group analyzed the Pre-Interview Instrument responses and inter¬ 
view discussion summary transcripts as well as other background materials to 
develop the findings and recommendations presented in this report. To foster an 
open and frank discussion, this report relates the assessments and comments of 
the interviewees without attribution or individual quotations. The Work Group has 
framed the results of the interviews with a set of concrete findings and achiev¬ 
able recommendations. To ensure that the information and responses provided 
by the venture capital community were presented accurately, each interviewee 
was asked to review and comment on the draft report. Their comments were 




The Ten Open-Ended Questions Used in the 
Interviews with Venture Capitalists 


1. What are the most important metrics used by your firm in evaluat¬ 
ing environmental technology investments? 

2. What is driving environmental technology investment—EPA activities 
or private-sector activities or both? 

3. Do you think environmental technologies have a more difficult 
entry and/or exit investment strategy than other clean technolo¬ 
gies? If so, what can be done to make it easier? 

4. Are there characteristics of environmental technologies and mar¬ 
kets that need to change to attract venture investment? 

5. Which environmental technology segments (e.g., climate change, 
water technologies, etc.) have the greatest potential to generate 
investments in the next few years? 

6. Are there “cross-over” opportunities for certain technologies to sup¬ 
port both environmental technology and energy technologies? 

7. What can EPA do to reduce the environmental technology invest¬ 
ment risks? 

8. What EPA activities present significant barriers to environmental 
technology investment? 

9. Are there some successful technology development and commer¬ 
cialization programs that EPA can learn from? If so, what are the 
programs? 

10. How can EPA continue a dialogue with the investment community 
in the future? 


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Venture Capital and Venture Capital Fund 

Venture capital is a type of private equity capital typically provided by pro¬ 
fessional outside investors to new, high-growth businesses. Generally made as 
cash in exchange for shares in the portfolio company, venture capital invest¬ 
ments usually offer the potential for above-average returns. A venture capital 
fund is a pooled investment vehicle (often a limited partnership) that primarily 
invests the financial capital of third-party investors in enterprises that are too risky 
for the standard capital markets or bank loans. Venture capital typically is asso¬ 
ciated with new, cash poor, and/or rapidly expanding companies. Venture cap¬ 
ital managers often are actively involved in the management of the expanding 
companies in which they invest. In return for the capital invested, venture capi¬ 
talists receive equity shares and privileges, such as active participation in the 
company's management and profit sharing. 

Environmental Technology 

Traditionally, the environmental technology sector has been viewed as a 
diverse range of equipment, services, and resources. There have been a number 
of definitions for this sector, one such definition was given in the 1995 report 
"Bridge to a Sustainable Future: National Environmental Technology Strategy" 
(see references in Appendix J), in which it was defined as: 

"A technology that reduces human and ecological risks, enhances 
cost effectiveness, improves process efficiency, and creates products 
and processes that are environmentally beneficial or benign. The 
word 'technology' is intended to include hardware, software, systems, 
and services. Categories of environmental technologies include those 
that avoid environmental harm, control existing problems, remediate 
or restore past damage, and monitor and assess the state of the envi¬ 
ronment." (National Science and Technology Council, 1995) 

Over the past 12 years, the definition of environmental technology has 
changed. In 2007, the Department of Commerce, International Trade 
Administration (ITA), defined the environmental technologies industry as goods 
and services that advance sustainable development by reducing risk, enhancing 
cost effectiveness, improving process efficiency, and creating products and 
processes that are environmentally beneficial or benign. The environmental 
technologies sector includes: air, water, and soil pollution control; solid and toxic 
waste management; site remediation; and environmental monitoring and recy- 


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cling. ITA found that the environmental technologies sector is comprised of the 
four major categories: 

■ Monitoring and Assessment—Technologies used to establish and monitor 
the condition of the environment. 

■ Pollution Avoidance—Equipment and processes used to prevent or mini¬ 
mize the generation of pollutants. 

■ Pollution Control—Technologies that render hazardous substances harm¬ 
less before they enter the environment. 

■ Remediation and Restoration—Technologies used to render hazardous 
substances harmless. 


According to the ITA, water equipment and chemicals, and air pollution con¬ 
trol represent the largest percentage of the U.S. environmental technologies 
equipment market; wastewater treatment and solid waste management repre¬ 
sent the largest percentage of the U.S. environmental technologies services mar¬ 
ket; water utilities and resource recovery represent the largest portion of U.S. envi¬ 
ronmental technologies resources market (U.S. Department of Commerce 
International Trade Administration, 2007). 


Clean Technology 


Many investors believe that clean technology is an investment theme or cat¬ 
egory. The definition used by the venture capitalists interviewed in this study is 
that cleantech is any knowledge-based product or service that improves opera¬ 
tional performance, productivity, or efficiency, while reducing cost, inputs, ener¬ 
gy consumption, waste, or pollution. Cleantech advocates view the metamor¬ 
phosis of the environmental technologies industry or sector into the Cleantech 
Sector much as many environmentalists view sustainability as the new form of 
environmental protection. This new view of environmental technologies has 
been adopted and promoted by Environmental Entrepreneurs (E2), an affiliate of 
the Natural Resources Defense Council (NRDC), one of the largest environmental 
advocacy organizations in the nation. 


The Cleantech Group (formerly the Cleantech Venture Network), a coalition 
of nearly 20,000 cleantech investors, companies and professional service organi¬ 
zations, categorizes cleantech investments into 11 segments: 


■ Agriculture 

■ Air & Environment 

■ Energy Efficiency 

■ Energy Generation 

■ Energy Infrastructure 

■ Energy Storage 


Materials 

Manufacturing & Industrial 
Recycling & Waste 
Transportation 
Water & Wastewater 


The Cleantech Group (http://www.cleantech.com) is a membership organi¬ 
zation of cleantech investors, companies, and professional services organizations 
with assets exceeding $6 trillion. (The Cleantech Group includes venture capital 


e 




firms, investment banks, limited partners, governments, and major corporations 
with offices in North America, Europe, China, and India.) 

Beyond traditional environmental technologies such as air and environment, 
recycling and waste treatment, and water and wastewater, several cleantech 
segments also include environmentally related technologies such as agriculture 
(e.g„ farm efficiency technologies, natural pesticides), materials (e.g„ green 
chemistry, nanomaterials, and environmentally friendly solvents), and transporta¬ 
tion (e.g., hybrid vehicle technology, efficient engines). 

In a May 2007 report, "Cleantech Venture Capital: How Public Policy Has 
Stimulated Private Investment," E2 and the Cleantech Group state that clean¬ 
tech categories encompass a broad range of products and services, from alter¬ 
native energy generation to wastewater treatment to more resource-efficient 
industrial processes. Although several of these categories are different, all share 
a common thread—they use new, innovative technology to create products and 
services that compete favorably on price and performance while reducing 
humankind's impact on the environment. To be considered cleantech, products 
and services must: (1) optimize use of natural resources, offering a cleaner or less 
wasteful alternative to traditional products and services; (2) have their genesis in 
an innovative or novel technology or application; and (3) add economic value 
compared to traditional alternatives" (Stack, et al„ 2007). 

B. Trends In Venture Capital Funding 

The United States maintains the oldest and most dominant position worldwide 
in venture capital. In 2006, U.S. venture capitalists invested $25.5 billion in 3,416 
deals (i.e., companies), realizing a 10 percent increase in deal volume and a 12 
percent increase in dollar value compared to 2005. In 2005, venture capital 
investments worldwide reached $31.3 billion (U.S. dollars). The United States, 
Canada, Europe, and Israel represent 93 percent of capital invested, while China 
and India account for the remainder (Deloitte & Touche, 2007). 

Generally, U.S. venture capital investing has recovered from the collapse of 
the internet investment bubble in 1999-2001. Venture capital investment peaked 
in 2000 with over $100 billion placed in deals at various stages. In August 2007, 
the National Venture Capital Association reported that 14 of the 17 industry sec¬ 
tors tracked by the association, including the industrial/energy sector, experi¬ 
enced an increase in the number of deals for the second quarter of 2007 
(National Venture Capital Association and PricewaterhouseCoopers, 2007). 

C. Environmental Technology Investment Market ■■■■■■■■I 

Significant investments are being made by the venture capital community in 
clean energy-related technologies, including "cross-over" technologies that yield 
both energy and environmental benefits. Although the growth potential for most 
environmental sectors is expected to continue to rise through 2010, the most sub¬ 
stantial growth is expected in the clean energy sector. Investors have indicated 
that there is a vast amount of capital available for investing in promising environ¬ 
mental technologies and many individual and institutional investors are seeking 
opportunities to invest in the growing environmental technology sector. Returns 
on these investments, however, still must compete with other investment options. 


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Therefore, it is critical to investors that areas of investment risk—often based on 
regulatory uncertainty and unpredictability—be identified and reduced. 

In 1995, the Interagency Environmental Technologies Office (IETO), a federal 
agency group created to enhance technology collaboration and reduce barri¬ 
ers, found that financial uncertainty and a high level of risk limit the availability of 
investment capital for environmental technologies. Although the environmental 
technologies industry at that time was larger than many other sectors of the U.S. 
economy, the IETO found it attracted very little private capital. In 1993, the IETO 
pointed out that approximately $31 million in venture capital was invested in con¬ 
ventional control and remediation technologies supporting just 12 firms. In 1994, 
this amount dropped to $25 million invested in fewer than 10 companies and was 
projected to continue to decline. The IETO concluded that a number of reasons 
accounted for the environmental technology industry's tendency to repel capi¬ 
tal. Government environmental policies and regulations were important drivers 
of the market but the timing and size of current and future markets often was a 
function of the specifics of regulation, including the timetable for new regula¬ 
tions, the stringency of current standards, and their enforcement (National 
Science and Technology Council, 1995). 

Today, there are more optimistic data about environmental technologies but 
the investment levels are small compared to energy technologies. The clean- 
tech category currently offers a good approximation for venture capital support 
for environmental technologies. Although the cleantech category is dominated 
by four energy segments (i.e., energy generation, energy infrastructure, energy 
storage, and energy efficiency) and energy-related investments have led other 
segments for the past 2 years, there has been some encouraging growth in some 
environmental technologies segments. U.S. and Canada investments in environ¬ 
mental technologies, such as recycling and waste and transportation (i.e., hybrid 
vehicles), also showed gains since 2005. Investments in energy-related technolo¬ 
gies totaled $2.14 billion, almost three times the amount invested in 2005, and 33 
percent greater than the investment total for the entire cleantech industry in 
2005 (Stack, et al., 2007). 

In 2006, cleantech became the third largest U.S. and Canada venture capi¬ 
tal investment category (11 percent of all venture investments), behind software 
and biotechnology. In 2006, total U.S. and Canada venture capital invested in 
cleantech companies reached $2.9 billion, a 78 percent increase over the $1.6 
billion invested in 2005 (Stack, et al., 2007). 

Since the economic downturn of 2000-2001, cleantech is one of the few U.S. 
categories that has experienced real growth in venture investments. While U.S. 
venture capital investments as a whole were down by 33 percent in 2006 com¬ 
pared to 2001, investments in U.S. cleantech companies were up 243 percent in 
that time (Stack, et al., 2007). 

In the second quarter of 2007, the cleantech sector was the third largest 
industrial sector based on venture capital investments, totaled $451 million going 
into 44 deals. This represented a 38 percent increase in the number of deals and 
a 46 percent increase in dollars, attributed to a $73 million investment in a solar 
energy company, the largest deal of the quarter (National Venture Capital 
Association and PricewaterhouseCoopers, 2007). 


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D. Opportunities for Increasing Investments in Environmental ■■ 
and Clean Technologies 

The "environmental marketplace" where technologies are deployed consists 
of several distinct sectors based on the physical resources addressed (e.g., water, 
air, land), services delivered (supply) and structure of consumption (demand). 

The growth potential for most environmental sectors is expected to continue to 
rise through 2010. As depicted in Table 1, economic activity is categorized in 
three broad sectors—Services, Equipment, and Resources—based primarily on 
the type of firms selling in each sector and what is sold, as well as the common 
purchasing patterns within those sectors. 


Table 1. Environmental Industry Sector Growth 1990-2000 and 2000-2010 

($ in billions) 


Environmental Industry Sectors 

2000 

1990-2000 

Growth 

2010 

2000-2010 

Growth 

Services 





Analytical Services 

$1.6 

-26% 

1.9 

19% 

Wastewater Treatment Works 

$30.0 

34% 

44.5 

48% 

Solid Waste Management 

$42.0 

45% 

58.8 

40% 

Hazardous Waste Management 

$8.0 

-15% 

9.7 

21% 

Remediation/Industrial Services 

$10.0 

5% 

13.7 

37% 

Consulting & Engineering 

$18.0 

21% 

28.8 

60% 

Equipment 





Water Equipment and Chemicals 

$20.0 

57% 

32.6 

63% 

Instruments & Information Systems 

$4.0 

84% 

6.0 

50% 

Air Pollution Control Equipment 

$18.0 

30% 

19.1 

6% 

Waste Management Equipment 

$9.6 

20% 

11.5 

20% 

Process & Prevention Technology 

$1.2 

192% 

2.0 

67% 

Resources 





Water Utilities 

$33.0 

53% 

42.3 

28% 

Resource Recovery (recycling) 

$18.0 

29% 

25.5 

42% 

Environmental Energy Sources* 

$15.0 

87% 

38.2 

155% 

U.S. Totals: 

$228.4 

35% 

$334.6 

46% 


* Environmental Energy Sources (biomass, wind power, landfill gas, solar power, geothermal, 
mini-hydros, fuel cells) encompasses both system sales and revenues from electricity produc¬ 
tion, The rough estimates for growth by Environmental Business Journal assume current federal 
and state tax incentives and other measures are renewed or remain in place as legislated. 

Several interviewees noted that venture capital firms are investing in new 
environmental technologies that hold promise for transforming large industrial 
process operations. Advanced Electron Beam is an example of such an invest¬ 
ment. It is a venture capital-supported environmental technology that has "in 
line" manufacturing process applications (see description of Advanced Electron 
Beam on page 16). 

These different markets can, in turn, be plotted by size and growth rate to 
characterize the nature of opportunities (see Figure 1). 

Group A in the figure represents small, but high growth market niches— 
Process, Prevention, and Instrumentation, including "clean energy"—where the 
growth rate and dynamism helps create larger opportunities for adopting innova¬ 
tive technologies. Venture capitalists express a clear preference for high growth 


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“Funding New 

Environmental 

Technology 

That Holds 

Promise 

for a Cleaner 

Environment” 

Advanced 
Electron Beam 

www.aeb.com 

RockPort Capital 
Partners 


Advanced Electron Beam (AEB) in Wilmington, Massachusetts, has devel¬ 
oped a breakthrough electron beam technology—the AEB Emitter—that 
is 10 times less expensive and 100 times more compact in size than con¬ 
ventional electron beam units. While electron beams have historically 
been used in industrial applications to replace chemical and thermal 
processes, adoption has been limited because of high equipment and 
operating costs, complex imple-mentation, and the huge size of con¬ 
ventional electron beam technologies. By contrast, the AEB Emitter 
makes it possible to integrate this clean energy source into a wide array 
of applications that was never before technically or economically feasi¬ 
ble. AEB Emitters can be aligned in multiples to produce a beam of any 
desired width and are small enough to be directed at any angle. 

AEB Emitters have an operating voltage of 80-150 kV and weigh less 
than 30 pounds. More-over, the approach requires no active vacuum 
pumping equipment, offers a compact, solid-state power supply, and 
requires no in-plant engineering or maintenance expertise. Specific AEB 
Emitter applications include: the destruction of airborne viruses and 
bacteria; the extension of shelf life of foods; generation of hydrogen for 
fuel-cell vehicles; the modification of recycled tires into high-quality 
engineered plastics; and the removal of hazardous gases, such as sulfur 
and nitrous oxides (SO x /NO x ), from fossil-fuel burning power plants. 

In March 2007, AEB announced it had received $17.5 million in a Series 
B funding round led by RockPort Capital Partners, with participation from 
existing investors Atlas Venture and General Catalyst Partners. The fund¬ 
ing will be used to accelerate commercialization of AEB Emitters as one 
of the world’s most efficient, clean, and cost-effective forms of industrial 
energy. 


markets. Trends for the clean energy market were recently published in a report 
by Clean Edge, Inc. (see text box on page 18). 

Group B represents larger, slower growth markets—Wastewater Treatment, 
Solid Waste, and Drinking Water, where growth is tied closely to demographic 
growth and suburban expansion. Technology in these markets often is geared to 
any change in regulatory standards or enforcement. 

Group C represents smaller, "back end" remedial markets—Remediation, Air 
Pollution Control, Waste Management Equipment, Analytical Labs, and Hazard¬ 
ous Waste—which are not growing as fast as the economy or demographics, 
and may actually contract in some years (e.g., with recession). Some aspects of 
these markets are shrinking, such as Superfund and cleanup of underground fuel 
tanks. Hazardous waste volumes also contracted in the 1990s as industry 
cleaned up operations. Landfills were not expanded much overall. 

Other market niches—Consulting Services, Resource Recovery, and Water 
Equipment—tend to be driven by the other sectors and regulatory changes. 
Water equipment could represent an opportunity for innovative technologies if 
regulatory changes were made, but buyers tend to be risk-averse and compli¬ 
ance oriented, often content to use conventional technologies. 




Figure 1. Plot of Market Size vs. Market Growth of Environmental Market 



E. Stages of Investment 

Historically, venture capitalists have invested in the initial stages of a compa¬ 
ny's development but the size and number of investments were cumbersome 
and the recent trend is to support companies at a later stage in their develop¬ 
ment. In general, there are four stages of company development in which ven¬ 
ture capital can be invested. These stages are: 

■ Seed/Startup Stage—the company has a concept or product under 
development; 

■ Early Stage—the company has a product or service in testing or pilot pro¬ 
duction; 

■ Expansion Stage—the company product or service is in production and 
commercially available; and 

■ Later Stage—the company product or service is widely available. 

The majority of venture capital investments go to follow-on funding for com¬ 
panies originally financed by angel investors, corporate investors, or government 
programs. This trend continued in 2007. In early August 2007, it was reported that 
venture capitalists invested $7.12 billion in 977 deals in the second quarter of 2007— 
the highest level of investment reported in a quarter since the third quarter 2001. 

By stage of company development these investments were: Seed/Startup - 3%; 
Early Stage - 19%; Expansion Stage - 33%; Later Stage - 44% (NVCA and 
PricewaterhouseCoopers, 2007). 

The National Association of Seed and Venture Funds (NASVF) found that ven¬ 
ture capitalists primarily invest in those business sectors that are not only growing 
rapidly but also have not yet reached the competitive shakeout stage. In other 
words, venture capitalists fill a gap between the early startup stage and later 
consolidation (NASVF, 2006). 


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Clean Energy Trends 2008 Report 
(http://www.cleanedge.com/reports/reports-trends2008.php) 


n ■ 

According to Cleon Energy Trends 2008, produced by Clean Edge (and co¬ 
authored by GreenBiz.com executive editor Joel Makower), global clean-ener¬ 
gy markets are expanding rapidly and just four sectors—biofuels, wind power, 
solar photovoltaics, and fuel cells—are projected to more than triple over the 
next decade, growing to $254.5 billion by 2017. Revenues in these four bench¬ 
mark sectors increased 40 percent in 2007, up from $55 billion in 2006 to $77.3 
billion in 2007. For the first time, three of fhese sectors are generating revenue 
in excess of $20 billion apiece, with wind now exceeding $30 billion. New glob¬ 
al investments in energy technologies—including venture capital, project 
finance, public markets, and research and development—have expanded by 
60 percent from $92.6 billion in 2006 to $148.4 billion in 2007, according to 
research firm New Energy Finance. 

The report indicates that global production and wholesale pricing of biofuels 
reached $25.4 billion in 2007 and is projected to hit $81.1 billion by 2017. The 
global biofuels market last year consisted of more than 13 billion gallons of 
ethanol and more than 2 billion gallons of biodiesel production worldwide. Wind 
power is expected to expand from $30.1 billion in 2007 to $83.4 billion in 2017. 
Last year's global wind power installations reached a record 20,000 megawatts 
(MW), equivalent in size to 20 conventional fossil-fuel power plants. Clean Edge 
also found that solar photovoltaics (including modules, system components, 
and installation), which totaled $20.3 billion last year, will more than triple to $74 
billion by 2017. Annual installations in 2007 were just below 3,000 MW world¬ 
wide. 


New global investments in energy technologies—including venture capital, proj¬ 
ect finance, public markets, and research and development—have expanded 
by 60 percent from $92.6 billion in 2006 to $148.4 billion in 2007, according to 
New Energy Finance. In the United States, venture capitalists invested $2.7 billion 
in the clean-energy sector, representing almost 10 percent of fofal venture cap¬ 
ital activity. 

The report copyright is held by Clean Edge, Inc., which offers the report for free 
on its Web site (http://www.cleanedge.com). 


The Work Group made a decision to focus this study on Early Stage invest¬ 
ments both because this is a critical phase in the success of technology develop¬ 
ment and, given the small number of interviews to be conducted, the Early Stage 
focus allowed the Work Group to narrow the field of potential interviewees. 
Although Early Stage investments were the primary focus of the study, the inter¬ 
viewees also described investments at other stages to make certain points. 

During the course of the interviews, the venture capitalists also provided exam¬ 
ples related to investments at earlier and later stages (see Appendix G). 


© 








This section contains findings identified by the Work Group from the nine inter¬ 
views conducted during the study. These findings are arrayed across the follow¬ 
ing four subsections: 

■ Drivers of Environmental Technology Investment 

■ Regulatory Context 

■ ERA Role in Technology Development and Commercialization 

■ Future EPA Interactions with the Investment Community. 

A. Drivers of Environmental Technology Investment 

The Work Group identified the following findings related to drivers of environ¬ 
mental technology investment: 

1. Although venture capitalists have invested in cleantech companies, 
investors are concerned that there currently is no system or metrics to 
monitor these technologies to determine if they are "cleaner" than exist¬ 
ing alternatives. 

2. Environmental investors expect venture grade returns; they are not invest¬ 
ing to "save the planet." 

3. Municipalities and utilities are the largest customers for environmental 
technologies and they are a difficult and risk-averse customer set. 

4. The role of the regulatory community is important in clean technology 
development and commercialization. 

5. Environmental technologies have a more difficult "exit strategy" than 
other clean technologies. (Exit strategy is the process through which ven¬ 
ture capitalists realize their investment returns through sale or initial public 
offering.) 

6. There is a lack of experienced managerial talent in environmental tech¬ 
nology companies. 

The decision thresholds for investors to capitalize environmental technology 
enterprises (i.e., companies or projects) are complex and varied. It was pointed 
out during the interviews that venture capitalists do not invest in research and 
development or even in technologies, per se; they invest in commercial enterpris¬ 
es for profit that are promoting innovative technologies under certain regulatory 
and market conditions and scenarios. 


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Although venture capitalists have invested in cleantech companies, investors 
are concerned that there currently is no system or metrics to monitor these tech¬ 
nologies to determine if they are "cleaner" than existing alternatives. 

Interviewees expressed the need to better understand the net environmental 
benefits of clean energy and other technology investments. The California Public 
Employees' Retirement System (CalPERS) uses both financial due diligence and 
environmental due diligence when deciding what investments to make in ven¬ 
ture capital firms that want to fund environmental technologies. Environmental 
Capital Group (ECG) currently performs the environmental due diligence service 
for CalPERS. 

A brief description of the ECG's environmental due diligence process is pre¬ 
sented in the text box on page 21, and a more complete description of the 
process is contained in Appendix H. 

Venture capitalists expect substantial profits over a 5 to 7 year horizon. As 
many of the interviewees noted, environmental investors expect "venture grade" 
returns; they are not investing to "save the planet." 

The most prevalent drivers identified among interviewees fall into three cate¬ 
gories across the spectrum of environmental technologies: (1) metrics—invest¬ 
ment criteria for venture funds; (2) policy—federal and state legal and regulatory 
framework, and legislative outlook; and (3) market factors, including technologi¬ 
cal obsolescence, customer resistance, etc. 

Metrics 

A variety of metrics drive the investment decision and these metrics can be 
characterized as "hard" metrics or "soft" metrics. 

Hard metrics are the fundamental criteria for investment decisions, such as: 

■ Expected rate of return commensurate with risk; 

■ Break-through technologies with good comparative advantage; 

■ Market size, penetration, and growth prospects; and 

■ Economic value proposition based on business plan, management team, 
and eventual exit strategy for capital return. 

Return on investment (ROI) was the metric most often cited by venture capi¬ 
talists during the interviews. Their belief was that a risk-adjusted ROI is the only 
measurement that matters in an investment. In other words, a highly profitable 
opportunity that has high risk and a long time frame is less attractive than a less 
profitable idea with low risk and a short time frame. Investors cannot know what 
the ROI will be ahead of time; they only know a projected one. Therefore, other 
factors are weighed to evaluate the potential for and risks to successfully meet¬ 
ing a projected ROI at the time of investment. 

Besides ROI, many venture capitalists are concerned whether the technology 
they are considering is a "breakthrough" technology with a good competitive 
advantage compared with what is currently available. The cost and technologi¬ 
cal advantages of a product and/or service need to be clearly demonstrated. 
Many venture capitalists agreed that the world market for "disruptive" green 




“Environmental Due Diligence Process Used by CalPERS” 


The California Public Employees’ Retirement System (CalPERS) uses both financial 
due diligence and environmental due diligence when deciding what invest¬ 
ments to make in venture capital firms that want to fund environmental tech¬ 
nologies. CalPERS uses the Environmental Capital Group (ECG) to perform the 
environmental due diligence. The purpose of the environmental due diligence 
is to answer two key questions: 

1. If the technologies of the portfolio companies are successfully com¬ 
mercialized, will the fund result in significant net environmental ben¬ 
efits? 

2. Does the fund management have the capability and willingness to 
implement its environmental strategy and measure the resultant 
environmental benefits? 

ECG has developed analytical methods to measure and report significant net 
environmental benefits created by the portfolio companies. To analyze net envi¬ 
ronmental benefits, ECG considers how the “new" process or product compares 
to the “existing" process or product. This requires an understanding of not only 
the environmental impacts of the company’s technology, but also of the tech¬ 
nology that it seeks to replace. It also requires establishing the boundaries of the 
analysis and considering significant positive and negative environmental 
impacts within those boundaries. The potential sources of environmental benefits 
relate to consumption of energy and raw materials, manufacture of product 
and by-products, and product functionality (i.e., the technology may be more 
environmentally benign than the product it replaces). All five areas—product 
raw materials, energy raw materials, manufacturing or energy-production 
process, product functionality, and by-products (emissions)—must be consid¬ 
ered in an analysis of net environmental benefits and they usually are linked. 

To move from concepts about environmental benefits to specific results for each 
portfolio company, ECG developed an Environmental Performance Reporting 
System (EPRS). The objectives of this system are to: (1) measure the net environ¬ 
mental benefits of each fund and portfolio company investment, and (2) estab¬ 
lish an environmental performance basis for proactively choosing future clean 
energy and technology investments. The calculation of net environmental ben¬ 
efits can be thought of as an engineering or technical report that links a busi¬ 
ness result, such as the number of product units sold or amount of material 
processed, to the associated environmental result, such as tons of emissions 
avoided or gallons of water saved. ECG works with the General Partner to con¬ 
duct this analysis, including assessing which environmental impacts should be 
included, identifying respected literature sources, and checking the analysis for 
consistency with similar technologies based on our broad understanding of the 
market. In some cases, the analysis is reviewed with an expert in the appropri¬ 
ate field. 

At the end of each fiscal year, the General Partner collects business results data 
from each portfolio company and calculates the associated net environmental 
benefits using the analysis framework established at the time of investment. ECG 
collects and reviews this information and works with the General Partner to 
update and refine the analysis framework. 


o 







technologies was good. The potential market size, the anticipated penetration 
into the market, and the short-term growth potential for the technology and serv¬ 
ice were viewed as significant determinants for driving investor decisions. 

For environmental technologies, most investors were concerned about the 
potential customers. Traditionally, municipalities and utilities are the largest cus¬ 
tomers for environmental technologies and investors agreed that they are a diffi¬ 
cult and risk-averse customer set. In using new environmental technologies, 
municipalities and utilities are concerned about the uncertainty of the technolo¬ 
gy and the financial strength of the supplier company's balance sheet. Based 
on these concerns, most investors evaluate products for these customers by ask¬ 
ing two questions: "What change in application or performance does this tech¬ 
nology present?" and "What is the capability of the management team to get 
the technology to market?" 

"Economic value propositions"—a company's business model, its manage¬ 
ment team, and the eventual exit strategy for the investment—were considered 
important for any environmental technology or clean technology investment. 
Unfortunately, the venture capitalists found a lack of experienced managerial 
talent in environmental technology companies and that most environmental 
technologies have a more difficult exit strategy than other clean technologies in 
the energy sector. 

Soft metrics are considerations often employed by public pension funds, 
foundations, and public institutions for environmental and other clean technolo¬ 
gy investments. They include: 

■ Investment transparency that withstands public scrutiny; 

■ Socially responsible investing; 

■ Sustainability or reduced environmental and resource impact; 

■ Good will reputation for investing in companies that have a positive 
impact on the environment; and 

■ Patient capital for longer term environmental improvements. 

Because of their nature, public pension funds and their investment decisions 
are likely to be held up to public scrutiny and require more "transparency" in 
their investments. These funds may be especially concerned about the public's 
reaction to losses on investments with which the public is unfamiliar such as high- 
risk venture capital investments. They also may require evidence of satisfactory 
investment performance on a more regular basis. 

Socially responsible investing describes an investment strategy that combines 
the intentions to maximize both financial return and social good. In general, 
socially responsible investors favor company practices that are environmentally 
responsible, support workplace diversity, and increase product safety and quality. 

The desire to "do well by doing good" is common to both sustainable invest¬ 
ing and socially responsible investing. The key difference between the two 
approaches is that sustainable investors tend to give more weight and attention 
to environmental issues than socially responsible investing. Sustainability or 
reduced environmental and resource impacts are secondary considerations for 
many investors. Many pension funds, foundations, and public institutions, howev¬ 
er, prefer sustainable investments that have beneficial environmental and eco¬ 
nomic results. 





Some venture capital firms are creating a "good will" reputation for investing. 
These firms offer high economic returns with a reputation for investing in compa¬ 
nies that will have a positive impact on the environment. Most sustainable invest¬ 
ment opportunities, for example, normally are believed to exist only in exciting 
young companies that focus on organic food or alternative energy production; 
these good will firms, however, invest in "old economy" industry companies, such 
as autos and oil, which are transforming themselves. 

Patient capital—funding from investors who do not expect immediate returns 
on their investments—is becoming more popular for some clean technology 
investments. Beyond the financial ROI, there are externalities associated with 
environmental investing. How much energy is saved, how much the carbon foot 
print is reduced, or how much water is conserved are becoming important exter¬ 
nalities in investing. The "universal investor concept" attempts to capture these 
primary and secondary considerations. 

Policy or Legal Framework 

The role of the regulatory community is important for clean technology invest¬ 
ment. Most investors are scared away from investing in a business that is based 
on the creation of regulations. They do not want to invest in companies that 
hope a regulation will drive their market potential. They prefer investing in com¬ 
panies that do a better job meeting existing regulations; this creates a better 
economic value. Although government regulations are important, venture capi¬ 
talists do not favor investments in technologies whose future markets could be 
eliminated with a "stroke of the pen" (i.e., regulation change). They want to see 
that the technology provides enough economic value on its own. 

The legal framework is comprised of many issues including applicable feder¬ 
al/state regulatory and enforcement regimes, tax policies, subsidy provisions, and 
other mandates. The regulatory and enforcement regime is an essential primary 
driver for many investments; whereas, taxes, subsidies, and mandates play impor¬ 
tant subsidiary roles. 

The legal framework is known as "policy risk" in the investment community. To 
minimize this "policy risk," an investment calculus needs reasonable certainty and 
stability for the legal framework with dependable terms of application of at least 
5 years. Where the legal framework is likely to change (such as new statutes 
authorizing "cap and trade" markets), clear signals in anticipation of such 
change are needed. Hence, regulation is not enough to mobilize venture invest¬ 
ment; economic value is vital. 

Market Factors 

Market considerations are an important metric in any investment decision. 
Nearly all interviewees agreed that the markets for environmental technology are 
driven by global markets because they comprise the most basic functions of any 
economy: water treatment and delivery, agriculture and land use, effluents of 
basic manufacturing and materials processing, air pollution handling, and the 
instrumentation, design, monitoring, and services of these functions. 


New market drivers are emerging that are creating more interest in environ¬ 
mental technologies (i.e., instrumentation, process efficiency) and more sustain- 







able energy options, which are driven by higher oil and gas prices, more severe 
storm and weather damage (e.g., hurricanes, tornados, flooding, extended 
drought), rapid economic growth in developing countries, and public awareness 
of resource strains. 

Anticipation of new laws and mandates (e.g., legislation on carbon emis¬ 
sions, automobile fleet mileage standards, and water treatment rules for shipping 
vessels) also is creating expectations for market growth. Climate change consid¬ 
erations, for example, will drive the market for water supply and treatment tech¬ 
nologies. 

Some interviewees identified market opportunities in "cross-over" technolo¬ 
gies. These are technologies that address both environmental and energy issues. 
One example of such a technology is the use of a wastewater treatment tech¬ 
nology to convert a sugar-laden waste stream for the generation of ethanol. 
Other cross-over technologies that were identified during the interviews included: 
technologies that save energy through efficiencies, waste-to-energy plants, 
drought-resistant crops, smart-grid sensors, and more energy efficient water treat¬ 
ment systems. 

Although several market niches are growing, others such as Superfund 
cleanup and underground storage tank remediation, have peaked in activity, 
and are subsiding. Still, the market and customer base for pollution control/reme¬ 
diation technologies is constrained by the risk-averse nature of municipalities, utili¬ 
ties, and their supporting engineers and consultants. Most interviewees con¬ 
firmed this view identifying "risk aversion of POTWs (publicly owned treatment 
works)" as the highest rated market factor in evaluating an investment. 

■ B. Regulatory Context ^■■ 

The findings from the interviews with respect to regulatory context include: 

1. The existence of regulations many times stimulates technology investment 
and the lack of regulations can sometimes retard technology investment. 
Therefore, regulation of carbon and climate change-related pollutants is 
needed to advance investment in new technologies to address climate 
change issues. 

2. The role of the regulatory community is important in clean technology 
development and commercialization. Early-stage investors are looking 
for a minimum of 3 to 5 years of certainty regarding investments contin¬ 
gent on government influences. Next-stage investors provide capitaliza¬ 
tion for taking these new technologies to commercial scale. During this 
commercialization phase, streamlined permitting and consistent enforce¬ 
ment become increasingly important. 

3. Investors expect that regulatory requirements will be aggressively 
enforced so that a "level playing field" for all participating companies will 
exist. 

4. Many EPA regulations prescribe specific control levels. Unfortunately, Best 
Available Control Technology (BACT) rules and regulations are not written 
in a way to maximum investor interest. 


O 






5. Some of EPA's most successful programs affecting investors are voluntary 
programs such as Energy Star. 

6. Intellectual Property Rights protection is an important issue for investors. 

Market conditions and governmental activities have major impacts on the 
attractiveness of investments in environmental technologies. Actions of the gov¬ 
ernment may include dissemination of information, advocacy, policy-setting, reg¬ 
ulation promulgation, promotion of voluntary programs, provision of funding, and 
ottering of other incentives. Environmental technology investments are not made 
in the absence of clear evidence that such ventures have a high likelihood of 
success from a market standpoint. Without substantial profit potential, an envi¬ 
ronmental technology will receive little attention. Even if the technology shows 
promise, governmental actions and programs can have major influence, both on 
the final investment decision and the final outcome. 

Regulatory Programs 

Regulatory programs are of key interest to venture capital firms. 

Technologies have been spawned by emergence of new and enhanced envi¬ 
ronmental requirements. Some of these technologies have represented major 
markets with substantial profit possibilities while others, similarly important, have 
been much narrower in scope and thus have been less appealing for investment. 

Interviewees ottered diverse views on the importance of environmental regu¬ 
lation. In some cases, investors reported that they avoid investing in ventures that 
are driven by, or dependent on, government regulation or regulatory compli¬ 
ance. In other cases, a market may be perceived to have the capacity to flour¬ 
ish because of the existence or promise of a regulation. The degree of opportu¬ 
nity is case-specific and dependent on the perspectives of the investor. Several 
venture capitalists saw regulations as useful but not sufficient to justify investment. 
Opinions ranged from investments in companies where there is little regulation 
(i.e„ government-wide regulation, not just EPA) to investments in companies 
affected by regulation to investments in companies where regulations help cre¬ 
ate the need for environmental technologies. Regardless of their perspective, 
most interviewees found that, beyond government regulations, there must be an 
economic case for the investment as well. 

Environmental technologies may be mandated by, or may arise from, two 
different kinds of regulations. Technology-based regulations specify that certain 
types of technologies must be installed in specific circumstances and that the 
operation and maintenance of those devices will constitute compliance with the 
regulations. Performance-based regulations deal less with modifying behavior 
and focus more on outcomes. They specify the desired result and give the regu¬ 
lated community more flexibility to determine how to comply in an effective way 
that achieves the desired end result. Performance-based approaches generally 
allow the regulated community to comply more efficiently and effectively, taking 
into consideration the unique circumstances of their particular business. Venture 
capital firms tend to have a preference towards performance-based regulations. 

Many EPA regulations prescribe specific control levels. Unfortunately, such 
regulations are not written in a way to stimulate keen investor interest. Because 


0 





many regulations are worded in a manner that limits flexibility, they do not 
encourage venture capitalists to invest in companies responding to technology 
standards. 

Regulatory predictability was cited by many interviewees as a necessity to 
merit a technology investment. For those technologies dependent on govern¬ 
ment regulation and for those investors interested in such technologies, success is 
dependent on certainty. Because administrations and legislatures change with 
regularity, policies are likewise subject to routine change. Most interviewees 
agreed that venture capitalists want potential government policies "memorial¬ 
ized" in statutes and regulations. 

Most investors are looking for a minimum of 3 to 5 years of certainty regarding 
investments contingent on governmental influences and they prefer even longer 
horizons where the regulatory requirements are fully known. Further, investors 
expect that the regulatory requirements will be aggressively enforced so that a 
"level playing field" for all participating companies will exist. 

Regulatory risks are an inherent part of any investment. Venture capitalists 
assume substantial risks as they become involved in new growth businesses. It is 
hard for them to understand why government agencies are not willing to assume 
risks relative to environmental technologies. As new environmental technologies 
emerge, they must be tested in real-world applications. In many cases, such tests 
require regulatory agency approval. Traditional regulations, especially those that 
are technology-based, however, require a degree of certainty that they will suc¬ 
cessfully achieve their design parameters. In many cases, field-testing is required 
to confirm hypothesized performance levels. In the most critical environmental 
programs and for the most promising technologies, interviewees suggested that 
regulators should find ways to promote field-testing of new technologies so that 
their capabilities can be established in a timely manner. Doing so would raise 
the interest level of those with capital to invest in such emerging markets. 

Non-Regulatory Practices 

In addition to direct regulatory programs and requirements, interviewees 
found that environmental technology investments can benefit from indirect regu¬ 
lation, voluntary programs, incentives, and general advocacy. Interviewees 
found that some of EPA's most successful programs affecting investments are vol¬ 
untary rather than regulatory in nature (e.g„ Energy Star). 

Indirect Regulation 

EPA's Toxics Release Inventory (TRI) is a public database of information on dis¬ 
charges, emissions, and other releases of chemical compounds exhibiting certain 
toxics characteristics. The TRI has become a database of prime interest to the 
public, raising concern in the minds of facility owners and the public about actu¬ 
al and potential environmental impacts of releases. Through public scrutiny and 
much media attention, companies became sensitized to these concerns and 
voluntarily initiated release reduction plans as well as substitutions of less toxic 
compounds where possible. Interviewees noted that since it was first introduced, 
TRI has caused major reductions in releases of toxic compounds without any reg¬ 
ulatory mandate to do so. Financial rating agencies have reinforced this trend 





based on the public information value or the "black-eye effect" of the TRI disclo¬ 
sures. 

Voluntary Programs 

EPA has established a number of voluntary programs that have encouraged 
the development of more environmentally-friendly technologies. The Energy Star 
Program was initially designed to identify consumer products that conserve ener¬ 
gy. Public interest in such products has been high and in the past 15 years the 
number of Energy Star products has grown substantially. As of 2006, more than 
40,000 Energy Star products were available in a wide range of categories, includ¬ 
ing major appliances, office equipment, lighting, home electronics, and more. In 
addition. Energy Star labeling can be found on many new homes and commer¬ 
cial and industrial buildings. In 2006, about 12 percent of the new U.S. housing 
stock was labeled Energy Star compliant. 

Incentives 

Venture capitalists are interested in technologies with a large potential for 
market success. Most are only interested in technologies that have a multi-billion 
dollar market potential because technologies penetrating large markets general¬ 
ly can grow more dramatically. Unfortunately, many niche environmental tech¬ 
nology products that may be protective of human health and the environment 
face less investor interest due to their limited market potential. 

Several interviewees cited the value of government activities that can assist 
with bringing technologies to the marketplace. Examples of such government 
activities include: tax credits, direct funding (grants and loans), special regulato¬ 
ry provisions such as expedited permitting, and general advocacy. 

Protection of Intellectual Property Rights 

Intellectual property rights (IPR) protection is an important issue for investors. 
Several interviewees acknowledged that some technologies within their portfolio 
companies were created from intellectual property developed in government or 
academic laboratories. IPR rules of ownership need to be clear, particularly in 
foreign markets. Mixed IPR ownership discourages investors. Interviewees found 
that IPR issues for government researchers must be addressed, and if these 
researchers cannot share in invention royalties, then the government should find 
some way to address this issue. 

Absence of Regulation 

Rather than being too regulatory dependent, sometimes the lack of regula¬ 
tions retards technology investment. Many interviewees cited climate change or 
carbon regulation as a key determinant for lack of investment in this market. If 
the government is going to mandate some type of carbon controls sometime 
between 2009 and 2011, investors need to be making those carbon-related 
investments now. Yet few investors are willing to make such investments with the 
uncertainty about whether there will be future government regulations in this 
area and the form that such regulations may take. 


0 





■ C. EPA Role in Technology Development and 
Commercialization 

The findings regarding EPA's role in technology development and commer¬ 
cialization include the following: 

1. EPA credibility is high in the investment community. EPA certifications are 
recognized internationally and can influence a technology's commercial¬ 
ization potential. 

2. EPA and other government agencies can have a "positive catalytic 
effect" in venture capital investments. 

3. In the past 2 years, the U.S. DOE Office of Energy Efficiency and 
Renewable Energy has initiated several successful clean technology 
development and commercialization programs. There are "cross-over" 
technologies that have both energy and environmental benefits (e.g., 
waste-to-energy and carbon sequestration technologies) on which EPA 
and DOE could collaborate. 

4. Some states, such as California and Pennsylvania, and non-profit organi¬ 
zations like Ceres (www.ceres.org)—a coalition of investors and environ¬ 
mentalists for sustainable prosperity—and the New England Clean Energy 
Council have initiated noteworthy clean technology initiatives. 

Environmental Technology Development and Investment through 
Market Drivers 

In addressing the question of what effort(s) might best promote market use or 
adoption of environmental technologies, interviewees noted the following efforts 
that could carry the most impact: 

■ Expedited permitting 

■ Federal mandates 

■ Government grants to environmental technology firms 

■ Federal subsidies for technology performance. 

In specifically addressing EPA's role, interviewees also suggested investment 
in environmental technologies would be enhanced by the following: 

■ Programs approving specific technologies for emission reductions. 

■ Grants or other incentives to directly fund a class of technologies. 

■ Reports of performance (verification or demonstration). 

■ Rules, regulations, or technical guidance specifying use of selected 
environmental technologies. 

These findings all suggest a need for EPA to establish market drivers for 
environmental technology development. 


© 






Interviewees noted that market mechanisms could be used to address or pri¬ 
oritize environmental technology investments. For example, CalPERS has estab¬ 
lished a $200 million Environmental Technology Program Board that targets invest¬ 
ments in environmental technology solutions that are more efficient and less pol¬ 
luting than existing technologies such as recycling, minimizing the use of natural 
resources, and reducing emissions, refuse, and contamination to air, water, and 
land. The primary objective of the Program is to achieve attractive investment 
returns over the long-term and help catalyze the adoption of environmental and 
clean technologies to the broader marketplace (see the description of CalPERS 
in the text box on page 30). 

EPA and other government agencies can have a "positive catalytic effect" 
in venture capital investments. Governmental policies and programs that sup¬ 
port the deployment of environmental technologies coupled with certainty that 
these activities will remain in place stabilize the market. Interviewees found, for 
example, that regulatory certainty is beneficial for both the regulated community 
and investors. Mandates that last for 3 to 5 years or longer to allow venture firms 
to amortize their investments enhance the predictability and influence of govern¬ 
ment activities on new technology markets. 

National and International Technology Verification and Certification 

Interviewees noted that third-party evaluations are helpful in supporting new 
technology development, growth, and acceptance in the marketplace. They 
also indicated that certifications are valuable in foreign markets. EPA certifica¬ 
tions are recognized internationally and can influence a technology's export 
potential. Interviewees noted that foreign interest in reciprocal technology verifi¬ 
cation programs is strong. Most thought that the Agency needs to push for 
objective, verified protocols and standards that can be used by all countries. 

EPA credibility is high in the investment market. Several interviewees noted 
that EPA procedures often can validate the performance claims of technology 
vendors. ORYXE Energy International and WaterHealth International are venture 
capital portfolio company examples of how EPA procedures helped validate 
technology developments for a fuel additive and ultraviolet disinfection technol¬ 
ogy (see the descriptions of ORYXE Energy International and WaterHealth 
International on page 31). 

Outside of Federal Government efforts, several interviewees commented on 
the value that non-governmental certification can provide to investors. Private- 
sector certification programs such as the LEEDs (Leadership in Energy and Envi¬ 
ronmental Designs) Green Building Rating System as well as the Forest 
Stewardship Council and Marine Stewardship Council accreditation services 
were cited as especially successful. 

Federal, State, and Private Programs for Technology Development and 
Investment 

Interviewees mentioned several government and non-government programs 
that have been created in the past several years that are successfully supporting 
innovative technology development. Targeted federal technology develop¬ 
ment programs are the most effective ways to stimulate investments. Existing 


0 






“Pension Fund Investing in Environmental Technology” 


Environmental Technology Program 

California Public Employees’ Retirement System (CalPERS) 

(http://www.calpers.ca.gov) 




CalPERS provides retirement and health benefits to approximately 1.5 million 
public employees, retirees, and their families and more than 2,500 employers. 

It has a strong track record of mobilizing financial capital in new and innovative 
ways, consistent with the highest fiduciary standards. Earlier this decade, 

CalPERS began to explore ways in which it could marry the jet stream of finance 
and the capital markets with public purpose with the goals of achieving positive 
financial returns, while fostering energy savings, sustainable growth, and sound 
environmental practices. 

In March 2004, CalPERS launched a new investment program to invest up to 
$200 million in the burgeoning environmental technology sector during the next 
few years. The System’s Board of Administration approved the CalPERS 
Environmental Technology Program that will target investments in environmental 
technology solutions that are more efficient and less polluting than existing 
technologies such as recycling; minimizing the use of natural resources; and 
reducing emissions, refuse, and contamination to air, water, and land. CalPERS 
established the program to capitalize on the evolving investment sector and 
deliver increased returns to its private equity portfolio. 

The primary objective of CalPERS’ $200 million Environmental Technology 
Program is to achieve attractive investment returns over the long-term and help 
catalyze the adoption of environmental and clean technologies to the broader 
marketplace. CalPERS is building a “best of breed,” diversified porffolio of clean 
technology-focused investments by investing across stages, strategies, geogra¬ 
phies, and structures. The Program defines environmental or clean technologies 
as solutions that are more efficient and less polluting than existing or legacy 
products, services, or technologies. Areas of particular interest include alterna¬ 
tive and renewable energy (clean energy), water technologies (clean water), 
advanced materials or nanotechnology (clean material), air purification tech¬ 
nologies (clean air), and transitional infrastructure opportunities. It is expected 
that investment returns in this sector will be commensurate with the risk-adjusted 
returns of the general private equity market. 

CalPERS uses both financial due diligence and environmental due diligence 
when deciding what investments to make in venture capital firms that want to 
fund environmental technologies. As of September 30, 2007, CalPERS had com¬ 
mitted $200 million to seven investment partners: NGEN , Craton Equity Partners, 
Carlyle/Riverstone, DFJ Element, RockPort Capital Partners, Vantage Point 
Venture Partners, and EnerTech Capital. 


federal programs cited by interviewees include DOE programs to develop renew¬ 
able energy sources and photovoltaics and U.S. Department of Defense (DOD) 
Programs to develop energy storage batteries. 

Federal 

At the federal level, many interviewees cited DOE's Energy Efficiency and 
Renewable Energy (EERE) Program and those ongoing at the DOE national lab¬ 
oratories as worthy examples for EPA to investigate. Two highly cited EERE 
Programs include the Solar America Initiative and the EERE Technology 
Maturation Funding Program. The Solar America Initiative (SAI) is a DOE effort to 
accelerate the development of advanced solar energy technologies. The goal is 





ORYXE Energy and WaterHealth International (WHI), both in Irvine, 
California, have developed patented environmental technologies that 
are addressing unique environmental problems. ORYXE Energy has 
developed a breakthrough additive, ORYXE™ RFT, to improve efficiency 
and reduce harmful emissions in residual oil-fired boilers and process 
heaters. WHI developed a low cost, ultraviolet water disinfection device, 
the UV Waterworks™ (UVW), which was invented to address the needs of 
underserved communities around the world. Both patented technolo¬ 
gies have been subjected to air and water pollution testing procedures 
developed by EPA to validate their pollutant reductions claims. 

Testing has proven that ORYXE RFT provides significant reductions in par¬ 
ticulate matter emissions while keeping NOx neutral and improving fur¬ 
nace heat transfer. Residual oil-fired plants experience reduced black 
smoke emissions from their exhaust stacks and improved overall efficien¬ 
cy with the use of ORYXE RFT. The efficiency improvement often offsets 
the cost of the additive, thus providing users with an emission reduction 
program that requires no large capital expense and little to no opera¬ 
tional expense. 

Dr. Ashok Gadgil, Vice President of Scientific Affairs for WHI, developed 
UVW at the DOE Lawrence Berkeley National Laboratory. Through a 
multi-stage filtration process coupled with a proprietary UV disinfection 
technology, contaminated water is converted into clean, potable water 
that exceeds the World Health Organization’s standards for potable 
water. The UVW-based system effectively purifies and disinfects water 
contaminated with a broad range of pathogens, including polio and 
roto viruses, oocysts, such as Cryptosporidium and Giardia. Low mainte¬ 
nance requirements, high efficiency, and high throughput make UVW 
systems capable of delivering affordable, high-quality drinking water 
even to remote and rural markets that have previously been under 
served. 

ORYXE Energy’s new technology already has been proven to reduce 
emissions in diesel fuel. The technology was used to develop an alterna¬ 
tive diesel formulation, approved by the Texas Commission on 
Environmental Quality, to meet the new Low Emission Diesel standards in 
Texas. The immediate success of this product, called ORYXE LED, also 
proves ORYXE Energy’s ability to meet its promise to supply a revolution¬ 
ary new additive to the market. 


to make solar electricity cost-competitive with conventional forms of electricity 
by 2015. 

Several interviewees mentioned that the DOE SAI is a good example of a suc¬ 
cessful federal funding program that can augment venture capital investments in 
photovoltaic technology. Soliant Energy is an example of a venture capital port¬ 
folio company that received SAI funding (see the description of Soliant Energy on 
page 32). 

DOE's EERE technology maturation funding program attempts to bridge the 
gap in technology commercialization funding during the particularly challenging 
period from prototype and proof of concept to the critical later stages of devel¬ 
opment and profitable revenues, a period known as the "Valley of Death." 


“Technology 

Verification 

Validates 

Innovative 

Environmental 

Technology 

Claims” 

ORYXE Energy 
International and 
WaterHealth 
International 

www. oryxe-energy. com 
www. waterhealth. com 

SAIL Venture Partners 


O 




“Using 

Government 
Grants to 
Augment 
Venture Capital 
Investment 
in Clean 
Technology” 

Soliant Energy 

www. soliant-energy. com 

RockPort Capital 
Partners 


Soliant Energy in Pasadena, California, designs and manufactures con¬ 
centrator photovoltaic modules for grid-tied and off-grid, residential and 
commercial uses. Soliant was founded in 2005 and aims to achieve 
grid-cost electricity via photovoltaic modules by 2010. Soliant’s product 
platform, the Heliotube™ concentrating solar panel, addresses the 
strong market need for lower-cost, higher-power solutions for rooftop 
solar power. 

In contrast to the other photovoltaic concentrator modules on the mar¬ 
ket today, the Heliotube panel includes concentration and solar tracking 
within the traditional form factor of a 4' x 6' solar panel. Heliotube’s inte¬ 
grated tracking mechanism provides more uniform power output than 
traditional flat panels and eliminates the substantial efficiency losses 
associated with fixed low-concentration modules. In addition, the 
Heliotube tracking system is self powered and plug-compatible with 
conventional “flat plate” x-Si products. As a plug-compatible alternative 
to standard solar panels, Heliotube conforms to the existing standards 
and practices of the large, established channels of solar installers, inte¬ 
grators, project managers, dealers, and distributors. 

In March 2007, Soliant Energy (previously Practical Instruments) was 
awarded a $4 million grant from the U.S. Department of Energy (DOE) 
Solar America Initiative (SAI). The DOE SAI grant will allow the company 
to accelerate development of its Heliotube™ product platform. Soliant’s 
project partners in the SAI award included: Spectrolab, the DOE Sandia 
National Laboratory, SunEdison, and the Massachusetts Institute of 
Technology. 

Soliant’s DOE SAI award is expected to allow the company access to 
more private equity support if needed in its photovoltaic product line 
development. Currently, Soliant is funded by leading energy and 
renewable technology investors, including RockPort Capital, Trinity 
Ventures, Nth Power, Silicon Valley Bank, and Rincon Venture Partners. A 
RockPort Capital General Partner serves on the Board of Directors of 
Soliant Energy. 


Usually, there is a 50/50 split in maturation funding between DOE and venture 
capital firms on various technology investments. Interviewees noted that some 
collaboration between DOE and EPA already exists on biofuels but more direct 
DOE and EPA laboratory communications should be explored. Candidate DOE 
national laboratories for EPA to investigate include the National Renewable 
Energy Laboratory (NERL), the Oak Ridge National Laboratory (ORNL), the 
Lawrence Livermore National Laboratory (LLNL), and the Argonne National 
Laboratory (ANL). The NREL's Industry Growth Forums and its periodic "show and 
tell" meetings with venture capital firms were cited as useful forums to encourage 
technology investment and development (see description of NREL on page 33). 
Several interviewees noted that they actively look for technology investment 
opportunities within the DOE national laboratories. 

Several interviewees identified portfolio companies supported by their firms 
that are successful examples of technology "spin outs" from DOE national labora¬ 
tories, such as NREL and ORNL. Aldis, Inc., Planar Energy Devices, and M2E Power 
are three examples of these DOE laboratory originated technologies (see the 
description of Aldis, Inc., and Planar Energy Devices on page 35). 




“Government Outreach to Venture Capital Community” 


The Department of Energy (DOF) National Renewable Energy Laboratory (NREL) 
programs with the venture capital community could serve as models for EPA to 
emulate to help commercialize innovative environmental technologies. Three of 
NREL’s programs to help commercialize promising technologies are described 
below. 

Clean Energy Industry Growth Forums —NREL’s Industry Growth Forums provide 
an opportunity for start-up clean energy companies to present and receive 
feedback on business plans before a panel of venture capitalists and other 
business executives. NREL has coordinated 20 Industry Growth Forums, which 
have facilitated the formation of at least 25 strategic partnerships. Insights from 
past forums have helped to improve the number and rate of commercial suc¬ 
cesses in the clean energy industry, and have enabled NREL and DOE to man¬ 
age and maximize return on technology development investments. 

The Clean Energy Alliance —This national alliance of clean energy business 
incubators helps emerging clean energy companies take more effective 
advantage of opportunities stimulated by the restructuring of the utility markets, 
sustainability concerns, and more stringent environmental regulations. NREL cat¬ 
alyzes strategic alliances among select business incubators across the country 
to provide an array of business and financial services to start-up clean energy 
companies. 

Technology Commercialization Development Fund Program— This new pilot 
program supports collaboration between researchers and companies to devel¬ 
op commercial products based on NREL innovations. Commercial partners will 
share 50 percent or more of project development costs, which will typically 
range from $150,000 to $1 million. Both NREL researchers and outside industry 
can submit proposals. 

Resources and Information for Renewable Energy Entrepreneurs— NREL pro¬ 
vides access to informational and how-to resources for renewable energy entre¬ 
preneurs, often at little or no charge. 


A similar approach adopted by EPA might enhance environmental technolo¬ 
gy development and investment. 

State 

Beyond federal programs, several interviewees cited state programs that 
encourage technology development and investment. The programs most often 
cited were those in Pennsylvania and California. 

The Pennsylvania Department of Environmental Protection (DEP), Office of 
Energy and Technology Deployment (OETD) serves as state s principal office for 
energy policy, the assessment of energy and environmental technology, and the 
promotion of the use of appropriate technology to address environmental prob¬ 
lems. OETD's initiatives illustrate and emphasize the common needs of a sustain¬ 
able economy and a self-sustaining natural environment. As such, OETD's priority 
projects encourage environmental technology enterprise, expand renewable 
and advanced indigenous energy opportunities, identify and work to overcome 
market and regulatory barriers, and promote related economic development in 
the Commonwealth. In particular, OETD works to make Pennsylvania a center for 






environmentally beneficial technology and a natural magnet for the manufac¬ 
turing jobs associated with these businesses. 

In September 2006, the Pennsylvania State Treasurer announced a new 
Keystone Green Investment Strategy in which Pennsylvania will: 

■ Reallocate up to $50 million in State Treasury assets to investment man¬ 
agers with a demonstrated track record of investing in clean technology 
stocks; 

■ Create a new $40 million investment fund to invest alongside the private 
sector in cleantech products and firms that benefit Pennsylvania's econo¬ 
my; and 

■ Develop new investment screens for its investment managers to use when 
evaluating a company's potential exposure to environmental liabilities. 

In February 2004, California State Treasurer Phil Angelides launched the Green 
Wave environmental investment initiative calling on the CalPERS and the 
California State Teachers Fund (CalSTRS) to implement a four-pronged investment 
strategy to bolster their financial returns, create jobs, clean up the environment, 
and combat global warming. The Green Wave initiative urged the pension funds 
to invest $1.5 billion in cutting-edge technologies and environmentally responsible 
companies, to prod companies to address the financial risks posed by environ¬ 
mental liabilities and global warming, and to reduce energy consumption by 
their massive real estate holdings. 

Non-Government 

Several interviewees noted that non-governmental programs such as the 
New England Clean Energy Council and Ceres—a national network of investors, 
environmental organizations and other public interest groups working with com¬ 
panies and investors to address sustainability challenges such as global climate 
change, have been successful in promoting cleantech or environmental technol¬ 
ogy investments (see descriptions of the New England Clean Energy Council and 
Ceres on pages 36 and 37, respectively). 

International 

Canadian provincial governments are very active in providing research and 
financial support to new technology companies. Venture capitalists noted that 
the Canadian technologies and management teams they see often are better 
than their U.S. counterparts, Interviewees suggested that the Federal 
Government investigate and coordinate with technology development and 
investment programs in other countries, and consider adopting the more suc¬ 
cessful approaches to improve technology development in the United States. 

■ D. Future EPA Interactions with the Investment Community ■■ 

With respect to suggestions for future EPA interactions with the investment 
community, the interviewees' findings were as follows: 

l. EPA has few programs that focus on the commercialization stage. 
Assistance at this stage is critical because many technologies are never 


O 






Battelle Ventures, LR and its aftiliate fund, Innovation Valley Partners (IVP), 
have committed nearly $8 million in start-up financing to two energy- 
related companies, Aldis, Inc., and Planar Energy Devices, Inc., which 
are direct spinouts of the U.S. Department of Energy’s national laborato¬ 
ries managed by Battelle Ventures’ sole limited partner, Battelle Memorial 
Institute (Battelle). 

Aldis, a traffic management technology company focused on energy 
efficiency, has a joint development agreement with Oak Ridge National 
Laboratory (ORNL). Planar Energy Devices (Planar), a power-storage 
company developing thin-film batteries, is a spinout of DOE’S National 
Renewable Energy Laboratory (NREL), as well as a licensee of both NREL 
and ORNL technology. 

Aldis and Planar are examples of how Battelle Ventures has acted as a 
“founder capitalist,” building technology companies from the ground 
up. With Battelle as a limited partner, Battelle Ventures cannot only 
deploy a unique set of company-building capabilities, but it also can 
leverage its position as a bridge between early-stage businesses or 
technology entrepreneurs and the Battelle network to add value to 
Battelle Ventures’ portfolio companies. 

Battelle Ventures investments in Aldis and Planar unfolded differently. For 
Aldis, assurances of the management team capability came before the 
technology. The idea for advanced traffic management came from the 
Aldis cofounders, who Battelle Ventures took to visit ORNL, where some 
related projects were in development. 

Battelle Ventures became aware of the differentiated power-storage 
technology created at NREL, which became the basis for Planar. 

Battelle Ventures funded early prototype development of the technology 
and recruited Planar’s Chief Executive Officer for the spinout. Planar 
then was introduced to complementary work going on at ORNL in the 
thin-film battery area and, as a result, became a licensee of ORNL tech¬ 
nology as well. 


commercialized because they cannot bridge the "Valley of Death" (i.e., 
the particularly challenging period from prototype and proof of concept 
to the critical later stages of development and profitable revenues). 

2. EPA often is viewed by the venture capital community as not being in 
touch with the world of business and commerce. 

3. The EPA Administrator and other EPA senior management officials need 
to be technology advocates and they need to think expansively about 
EPA responsibilities related to clean technologies and energy. 

4 . Most venture capital firms are unaware of what EPA does other than 
promulgate and enforce environmental regulations. 

5. EPA should consider new ways of creating a "stamp of approval" for 
environmental technologies and recognition programs for plants and 
other manufacturing facilities. 


“Technology 
‘Spinouts’ from 
Government 
Laboratories” 

Aldis, Inc., and 
Planar Energy 
Devices 

www. aldiscorp. com 
www.planarenergy. com 

Battelle Ventures 




In the first Environmental Technology Subcommittee report, EPA Technology 
Programs and Intra-Agency Coordination, it became apparent that EPA had few 
programs to assist technologies at the stage of commercialization. EPA programs 
assisting technologies in this phase of the continuum have experienced substan¬ 
tial budget and resource reductions in recent years. Interviewees noted that EPA 
assistance at this stage could provide the impetus needed to interest the invest¬ 
ment community in promising new technologies. 


“Regional Mechanism for Bringing Together Venture 
Capitalists, Industry, Academia, and Government to 
Accelerate the Region’s Clean Energy Economy” 


The New England Clean Energy Council’s mission is to accelerate New 
England’s clean energy economy to global leadership by building an active 
community of stakeholders and a world-class cluster of clean energy compa¬ 
nies. 

The Council represents a diverse set of stakeholders, including the industry asso¬ 
ciations, area utilities, local universities, labor, and large commercial end-users. 
The Council also includes 30 Chief Executive Officers of the region’s leading 
clean energy companies, representatives from most of Massachusetts’ top 10 
law firms, and partners from more than a dozen of the top New England venture 
capital firms (with a total of more than $8 billion under management). The 
Council serves as a forum through which these players collaborate on common 
interests. 


The Council focuses its resources on five key areas, each of which has a signifi¬ 
cant impact on fulfilling the organization’s stated goal of accelerating the 
region's clean energy economy. These focus areas are innovation, growth, 
analysis and education, market adoption, and policy. 


EPA often is viewed by the venture capital community as not being in touch 
with the world of business and commerce. This lack of contact has produced 
and may be in part be caused by cultural differences that include the language 
that is used, the issues that are most important, the types of people who are 
involved, the ways of doing business, and others. It would be beneficial to EPA, 
the venture capital community, the environment, and the economy for EPA to 
engage with the venture capital community in significant ways to bridge this cul¬ 
tural divide and bring together the resources of both sides. 

Increasingly there are shared values for EPA and the investment community 
in believing that protecting and improving the environment are both important 
ends in themselves and important for creating new business opportunities. The 
major issues forcing this convergence are the very strong belief that climate 
change is real and needs to be recognized by government as a threat that 
requires government leadership and the need for energy independence which 
drives investment in alternative and renewable energy sources. 

The Administrator and other senior management need to be technology 
advocates; to think expansively about EPA's responsibilities related to cleantech 
and energy, including moving into areas that have been seen as the purview of 
DOE; to create new mechanisms to support investment in innovative technology 
development and commercialization, in part by learning from DOE and other 
federal, state, local, and private sector organizations. 




“National Mechanism for Bringing Business, Capital 
Markets, and Environmentalists Together to Help 
Corporate Governance Address Climate Change” 


Ceres (http://www.ceres.org) is a national network ot investors, environmental 
organizations and other public interest groups working with companies and 
investors to address sustainability challenges such as global climate change. 
Ceres’ mission is to integrate sustainability into capital markets for the health of 
the planet and its people. 

At its founding in 1989, Ceres introduced a bold new vision to the business com¬ 
munity. That vision is of a world in which business and capital markets promote 
the well being of human society and the protection of the earth’s biological sys¬ 
tems and resources. Ceres advances its vision by bringing investors, environ¬ 
mental groups, and other stakeholders together to encourage companies and 
capital markets to incorporate environmental and social challenges into their 
day-to-day decision-making. Ceres has received numerous awards including 
the 2006 Skoll Award for Social Entrepreneurship and the Fast Company/Monitor 
Group Social Capitalist award, and was named one of the 100 most influential 
players in the corporate governance movement by Directorship Magazine. By 
leveraging the collective power of investors and other key stakeholders, Ceres 
has achieved some dramatic results: 

■ Launched the Global Reporting Initiative (GRI), now the de-facto internation¬ 
al standard used by more than 1,200 companies for corporate reporting on 
environmental, social and economic performance. 

■ Partnered with Yale University and the insurance firm Marsh to create the 
Sustainable Governance Forum on Climate Risk, a unique leadership devel¬ 
opment program designed to help corporate leaders address the problem 
of climate risk. 

■ Spearheaded dozens of breakthrough achievements with companies, such 
as Nike becoming the first global apparel company to disclose the names 
and locations of its 700-plus contract factories worldwide in 2005, Dell 
Computer agreeing in June 2006 to support national legislation to require 
electronic product recycling and "takeback" programs, and Bank of 
America announcing a $20 billion initiative in March 2007 to support the 
growth of environmentally sustainable business activity to address global cli¬ 
mate change. 

■ Brought together 500 investor, Wall Street, and corporate leaders at the 
United Nations in 2005 to address the growing financial risks and opportuni¬ 
ties posed by climate change. The ground-breaking meeting included 28 
U.S. and European investors approving a 10-point action plan seeking 
stronger analysis, disclosure, and action from companies, Wall Street, and 
regulators on climate change. Another investor summit will be held in 
February 2008. 

■ Launched and directs the Investor Network on Climate Risk (INCR), a group 
of more than 60 leading institutional investors with collective assets exceed¬ 
ing $4 trillion. 

■ Published cutting-edge research reports to help investors better understand 
the implications of global warming. Among those: a January 2007 report, 
Climate Risk Disclosure by the S&P 500, an August 2006 report, From Risk to 
Opportunity: How Insurers Can Proactively and Profitably Manage Climate 
Change, and a March 2006 report, Corporate Governance and Climate 
Change: Making the Connection, which analyzed how 100 ot the world’s 
largest companies are addressing the business challenges from climate 
change. 


o 






Need for Leadership at the Top 


The role of the Administrator is very important in establishing a relationship 
with the venture capital community. The Administrator's involvement is essential 
for EPA to be viewed as trying to make its work more relevant to the investment 
community. 

Interviewees viewed this study as a good first step because the recommen¬ 
dations will go to the Administrator. One of the first things the Administrator can 
do in response to this study is to host a national roundtable of senior venture cap¬ 
italists to begin a dialogue between EPA senior management and the investment 
community. The national meeting could be followed by regional EPA-investor 
meetings that will extend this dialogue. At some point these dialogues should 
include technology developers, academia, and other appropriate public and 
private organizations. 

There also can be mechanisms created that will enable an "open door" of 
easy communication with senior members of the investment community on a 
continuing basis. One way would be to create an advisory panel that includes 
members of the investment community so they can participate in studies and 
give advice to the Administrator. Another way is to periodically meet for a short 
period with the most senior members of the investment community, which would 
permit a "taking of the pulse" of concerns, needs, approaches, and other issues. 

The Administrator is also uniquely able to bring both policy and technology 
issues into discussions with venture capitalists. The plans for and status of regula¬ 
tions and enforcement are important types of information that the investment 
community needs and wants. This ranges all the way from the question of car¬ 
bon taxes and "cap and trade" to municipal wastewater treatment plants. 

These issues have important consequences for the venture capital community's 
investment in innovative technology development and commercialization. 

Investors' risk calculations sometimes include the likelihood of a new govern¬ 
ment regulation being put into effect and the lead time needed to develop 
breakthrough technologies. The intelligence that EPA senior management can 
offer in this regard coupled with the Agency's understanding of the most impor¬ 
tant technology needs and the existence of new ideas and approaches are very 
important for these investors. Companies have staff members who concentrate 
on a specific technology area and whose job is to find out this type of informa¬ 
tion. The more proactive EPA can be in helping companies to find this informa¬ 
tion, the more relevant those companies will view a continuing relationship with 
EPA. 

Need for Communication Follow-Through 

Venture capital firms would be interested in knowing what the Agency cares 
about and what its resources are in terms of technology, technical expertise, 
facilities, testing capabilities, etc. EPA can provide this information to the venture 
capital community in part by attending and making presentations at investor 
conferences and other meetings. These are opportunities to describe the most 
important environmental problems EPA is addressing and what the technology 
needs are to solve them, as well as some of the latest EPA and non-EPA technol¬ 
ogy developments that EPA has found. 


Q 





EPA can use its Web site to offer easy access to information about technolo¬ 
gy development activities that might offer investment opportunities. It can use 
email to directly target key venture capital firms that are making cleantech and 
environmental technology investments. EPA can open its laboratories to visits by 
venture capitalists so they can not only learn about the latest technology devel¬ 
opments but also talk with the researchers and possibly establish continuing rela¬ 
tionship that could result in investment in the future. 

Need for Programmatic Follow-Through 

To connect with and enhance EPA's ability to substantively work with the 
venture capital community it is necessary to have adequate programmatic and 
resource capabilities. 

Programmatic follow-through between EPA laboratories and venture capital 
companies can be through the development of cooperative research and 
development agreements (CRADAs). As EPA works more closely with the invest¬ 
ment community, there will be increased opportunities for third party funding of 
the development of innovative technologies. 

Interviewees noted that CRADAs have been useful in commercializing tech¬ 
nologies that have originated from government laboratories. M2E Power is an 
example of a technology that originated in the DOE Idaho National Laboratory 
and was commercialized using a CRADA (see the description of M2E Power on 
page 40). 

If there is a good relationship a venture capital firm and an EPA laboratory, 
for example, the venture capital firms may bring companies they have found 
that are developing new technologies to the laboratory to create a working rela¬ 
tionship among all three parties. This could result in new cost-sharing arrange¬ 
ments. 

There is a great need for EPA to invest more in its current technology devel¬ 
opment and commercialization-related programs and to create new types of 
supports for these purposes. 

Current programs include the SBIR program and the ETV program. EPA could 
increasingly encourage and assist the use of third-party evaluations. EPA could 
support technology demonstrations at federal facilities. Air purification, water 
membranes, and sterilization may be areas where technology demonstrations 
could be conducted at federal facilities. There is less 

interest in federal remediation demonstrations by investors because the exit 
strategy for these companies is difficult. 

EPA can look at new ways of creating a "stamp of approval" for technolo¬ 
gies, which can include recognition through programs like Energy Star and 
through awards and public statements. EPA could consider an Energy Star pro¬ 
gram for plants and manufacturing facilities. If manufacturing plants realized 
that additional energy efficiency or more pollution reductions would merit EPA 
recognition, this could make a major difference (e.g., raise employee morale). 
Public recognition can be a strong personal and corporate motivator. 






“Utilizing 
CRADAs to 
Demonstrate 
and 

Commercialize 

Innovative 

Technologies” 

M2E Power 

www. m2epo wer. com 
@Ventures 


M2E Power, Inc., a Boise, Idaho company, has developed a micro-gen¬ 
erator that converts everyday human and vehicle motion into enough 
energy to power mobile electronic devices. The company expects its 
technology—an advance on the technology tound in devices like self¬ 
winding watches and battery-free flashlights—will eventually power cell 
phones, digital cameras, and portable entertainment players. For now, 
however, the company is focusing on powering mobile devices on the 
battlefield. 

The patent-pending M2E™ (Motion to Energy) technology originated 
though a cooperative research and development agreement (CRADA) 
with the Department of Energy’s Idaho National Laboratory (INL). Inventor 
Eric Yarger and his team at the INL sought to ease the military’s battery 
dependence for mobile power and offer soldiers a way to generate 
power as they move around. It leverages the well-proven Faraday 
Principle (energy produced via motion of a magnet through a wire coil), 
but with changes in the magnetic architecture that have broad applica¬ 
bility to many sizes of motor generators. 

In November 16, 2007, (©Ventures, the clean technology venture capital 
business of CMGI®, Inc., announced that it made a $2.0 million invest¬ 
ment in M2E Power, Inc. (©Ventures participated in the company’s $8 
million Series A financing round, along with OVP Venture Partners, 
Highway 12 Ventures and existing investors. 

M2E Power will use the funds to speed commercialization of its M2E™ 
technology, which has the potential to fundamentally transform the way 
military and consumer mobile devices are powered. M2E’s core tech¬ 
nology also is potentially applicable to large-scale power generation, 
such as wind, wave, and most other electromagnetic induction-based 
generation technologies. 

M2E is an eco-friendly, cleantech solution that can significantly reduce 
carbon emissions in larger applications. Depending on usage, it may 
not need to draw from power grids to recharge itself. It eliminates up to 
30 percent of the highly toxic heavy metal contained in typical batteries 
and—by doubling battery life—cuts in half the number of batteries dis¬ 
carded in landfills. 


EPA can investigate "Entrepreneur-in-Residence" and "Entrepreneurial 
Fellows" programs as a means of exposing successful entrepreneurs to environ¬ 
mental technologies (see description in the text box on page 41). 

EPA can develop new ways to provide financial backstopping for innovative 
technologies. These include providing seed funding to small companies at the 
early stages of technology development. It can include grants that are more 
substantial at later stages. It can provide loan guarantees so if investment and 
utilization of innovative technologies fail there can be financial support to lessen 
the cost to the investor. There also can be use of revolving funds. 


O 




“Government Partnering with Venture Capitalists to 
Commercialize Technology from Federal Laboratories” 


On February 27, 2008, DOE announced the competitive selection of three ven¬ 
ture capital firms to participate in its newly established Entrepreneur-in- 
Residence (EIR) pilot program, which aims to accelerate deployment and com¬ 
mercialization of advanced clean energy technologies from three DOE national 
laboratories into the global marketplace. The EIR pilot program provides venture 
capital-sponsored entrepreneurs with access into three of DOE’s nafional labo¬ 
ratories to accelerate adoption of advanced renewable energy and energy 
efficient technologies to fundamentally transform how the nation is powered. 
DOE is leveraging private-sector expertise in new ways to capitalize on cutting- 
edge technologies that are ripe for commercialization. 

The EIR pilot program involves placing venture capital-sponsored and selected 
entrepreneurs in three of DOE’s national laboratories to identify laboratory- 
developed technologies funded by DOE’s Office of Energy Efficiency and 
Renewable Energy, and to develop business cases for their commercialization. 
DOE has selected Kleiner, Perkins, Caufield & Byers in Menlo Park, California, to 
work with DOE’s National Renewable Energy Laboratory, ARCH Venture Partners 
in Chicago, Illinois, to work with DOE’s Sandia National Laboratory, and 
Foundation Capital in Menlo Park, California, to work with DOE’s Oak Ridge 
National Laboratory. Each laboratory will host one entrepreneur-in-residence for 
an initial period of 1 year, and DOE will support this work by providing up to 
$100,000 for each entrepreneur to help defray salary and other expenses. 

Each firm will match DOE funding and may contribute additional funds to sup¬ 
port its entrepreneur’s work. Using their vast business expertise, the selected firms 
will be permitted to give proven start-up entrepreneurs the opportunity to work 
directly with laboratory staff for a hands-on look at various, commercially viable 
technologies. 

Entrepreneurs will conduct technology assessments, evaluate market opportuni¬ 
ties, formulate preliminary business cases, and propose business structures in an 
effort to bring cutting-edge technologies to market. 

Upon selecting a technology for commercializafion, entrepreneurs-in-residence 
and fheir venfure capital sponsors would negotiate a license to use the labora¬ 
tory-developed technology. Working with their respective entrepreneur, the ven¬ 
ture capital sponsors will form and finance a start-up business based on the 
licensed technology. The foundation of each sfart-up's business plan would be 
the commercialization of licensed clean energy technologies. 

To further accelerate the commercialization process, the EIR pilot program seeks 
to utilize a Standard License Agreement—built off the structure of successful uni¬ 
versity licenses—that is tailored for entrepreneurs and small businesses. The 
Standard License Agreement includes a provision that would permit the EIR to 
offer partial ownership of the start-up company as full or partial payment for the 
license. This provides the opportunity for a start-up company to use its initial 
resources to grow the company rather than to make substantial up-front cash 
royalty payments. 


E. Actions of Venture Capital Firms to Help EPA Encourage ■■ 
Environmental Technology Development and Demonstration 


Interviewees identified several actions that venture capitalists could do to 
encourage environmental technology development and demonstration. These 
actions include: 

■ Conduct Direct, Routine Communications with Key EPA Managers and 
Staff About Legislative or Environmental Policy Issues Affecting Clean 


O 





Technology Development— Several interviewees believed that the recent¬ 
ly passed Energy Independence and Security Act, Public Law 110-140, 
signed on December 19, 2007, represents a revolutionary boost for 
ethanol production. Routine communications between EPA managers 
and staff (e.g., the SETO and RTAs) and venture capitalists about existing 
laws and their impact on technology development could be beneficial. 
Further, they thought that alerting EPA managers and staff to venture 
capital investment considerations might encourage the Agency to better 
understand commercialization opportunities for environmental technolo¬ 
gies. Some interviewees offered to meet with EPA managers and staff in 
Washington, DC, during their periodic visits to the area to discuss venture 
capital investments in clean technologies. 

■ Co-Sponsor an “Entrepreneur-in-Residence” Program at EPA 
Laboratories— Several interviewees suggested that EPA review the DOE 
NREL and MIT Entrepreneur-in-Residence (EIR) programs for possible appli¬ 
cation in the EPA labs. Potential "pools" of entrepreneurs could be identi¬ 
fied and vetted through partnerships with private-sector organizations. 
Supporting private-sector organizations for EIR partnership could include: 
non-profit organizations such as the New England Clean Energy Council; 
venture capital firm(s); or national trade associations such as the National 
Venture Capital Association, the National Association of Small Business 
Investment Companies, and others. 

■ Broker Partnerships Between DOE and EPA or EPA and the Small Business 
Administration (SBA) on Technology Development Issues— Several intervie¬ 
wees noted that their portfolio companies have already "spun out" tech¬ 
nologies from DOE national laboratories and in some cases combined 
innovative technologies across laboratories or "brought innovative tech¬ 
nology ideas" into national laboratories for investigation. Venture capital 
firms could broker technology concepts between DOE and EPA laborato¬ 
ries and possibly co-fund development of these technology demonstra¬ 
tions. 

The SBA has licensed Small Business Investment Companies (SBICs) for 
over 50 years. Although no interviewees were SBIC-affiliated firms, officials 
from these firms through their trade association—the National Association 
of Small Business Investment Companies (NASBIC)—might be able to 
identify environmental technologies of mutual interest between SBA and 
EPA. 

■ Invite EPA Officials to Visit Environmentally Beneficial Venture Capital 
Sponsored Technology Demonstrations— Several interviewees had portfo¬ 
lio companies that were developing innovative environmental technolo¬ 
gies or technologies that were being commercialized based on proto¬ 
types developed at DOE national laboratories or academic institutions. 
Visits of EPA experts to these portfolio companies could offer the Agency 
an opportunity to review these technologies and give EPA officials exam¬ 
ples of how similar technology demonstrations might be conducted 
based on EPA sponsored prototypes. 

■ Volunteer to Participate on EPA Advisory Boards and Committees— 

Several venture capitalists acknowledged that they actively serve on 
advisory boards for DOE national laboratories. These interviewees also 
expressed interest in serving on EPA advisory boards to provide advice to 

O 






the Agency on how EPA can encourage venture capital investment in 
promising environmental technologies. Venture capital representatives 
also could make presentations to Agency offices, boards, work groups, 
etc., concerning actions EPA can take to encourage investment in envi¬ 
ronmental technology. 

■ Identify Models for EPA Officials to Consider to Address High Priority 
Environmental Problems— Interviewees argued for EPA to consider market 
mechanisms, with regulators and investors working together, to address 
high priority environmental problems like climate change. One successful 
model that was cited was the joint meetings among the California 
Environmental Protection Agency (CalEPA), the California Public Utilities 
Commission (CPUC), and CalPERS that have been conducted for the 
past 2 to 3 years to address California energy and environmental issues. 

■ Invite EPA Officials to Speak at Cleantech Conferences, Forums, and 
Meetings— Several interviewees said that EPA officials have been notice¬ 
ably absence from cleantech activities. National trade association meet¬ 
ings and regional venture capital or investor forums may offer opportuni¬ 
ties for Agency representatives to make presentations and/or routinely 
participate in networking activities. 

San Francisco, California, and Boston, Massachusetts, are the two most 
active U.S. regions in cleantech investments. Six of the nine interviewees 
had offices in one or both of these locations and routinely participated in 
local venture capital forums and conferences. 

■ Review and invest in EPA Small Business Innovation Research (SBIR) 
Program Technologies —Nearly all of the interviewees were familiar with 
the federal SBIR Program. Although none of the interviewees had portfolio 
companies that commercialized an SBIR technology, several interviewees 
expressed interest in reviewing EPA's SBIR-sponsored technologies. 

The venture capital community also could advertise through its networks 
SBIR solicitations and awards, as well as potentially advise SBIR recipients 
where additional funding may be available. Venture capital representa¬ 
tives also expressed interest in serving on an EPA advisory committee on 
SBIR activities. 


O 










































A common, notable theme among the venture capital investors interviewed 
is that there is a growing interest in environmental technologies, spurred by 
awareness of global issues such as climate change and the diminishing sources, 
high costs, and environmental consequences of carbon-based energy. Also of 
concern are the decreasing availability and increasing costs of other essential 
resources such as clean water. An expanded interest in environmental responsi¬ 
bility stimulates interest and awareness of new technologies, and the global mar¬ 
ketplace increasingly strives to recognize the business as well as social costs of 
negative environmental consequences. 


Many individual and institutional investors are seeking opportunities to invest 
in the growing environmental technology sector. There is a vast amount of capi¬ 
tal available for investment. Returns on investment, however, still must compete 
with other investment options. Therefore, it is critical to investors that areas of 
investment risk—often based on regulatory uncertainty and unpredictability—be 
identified and reduced. 


Horizons for investment contemplate long-term potential for the technology, 
and a predictable forecast of the regulatory environment is essential to reduce 
uncertainty. Moreover, the new challenges that will be solved by emerging tech¬ 
nologies often require a new regulatory framework. Delays in establishing that 
regulatory framework impede investment in new technology by perpetuating the 
risk of an uncertain, unpredictable market. 

For these reasons, effective stimulation and adoption of new technology 
requires timely regulatory action. EPA must accelerate its engagement with new 
technology developers and investors, and commit to a credible, long-term advo¬ 
cacy of new technology. 

The venture capitalists interviewed in this study and the Work Group members 
identified some specific actions that EPA and the venture capital community can 
take to stimulate early-stage investment and improve the promotion and adop¬ 
tion of new technology. 

It is important that the Agency initiate action promptly to signal its commit¬ 
ment to stimulating and supporting the development of new technology solu¬ 
tions. Some low-cost but highly visible actions could have immediate impact 
and result in immediate gains. Others will require a long-term commitment by the 
Agency. Some of the recommendations will require funding, while others 
depend on leveraging the Agency's regulatory authority or its cumulative techni¬ 
cal and scientific know-how to influence the market and investors. The 
Environmental Technology Subcommittee urges EPA and the venture capital 
community to consider the following recommendations and take timely action to 

implement them. 


O 













■ A. Recommendations for EPA 


Key Recommendations 

1. Recognize carbon dioxide, greenhouse gases, and climate-change relat¬ 
ed pollutants as pollutants that are addressed in Goal 1 of EPA’s Strategic 
Plan (Clean Air and Global Climate Change*) and take priority measures 
within EPA’s authority to establish standards and long-term regulations for 
these pollutants, thereby signaling to investors the predictability and cer¬ 
tainty deemed necessary to drive the market for environmental technolo¬ 
gies. 

a. Establish a clear regulatory framework for carbon dioxide, green¬ 
house gases, and climate change-related technologies. 

b. Include in the Strategic Plan a focus on technology objectives that 
address environmental consequences related to climate change. 

c. Host a Climate Change Technology Symposium with regulators 
and investors to discuss new technology solutions to the environ¬ 
mental challenges of climate change. 

d. Publish long-term regulatory outlooks for other emerging technolo¬ 
gies in such market segments as alternative energies, nanotech¬ 
nology, and pharmaceuticals. 

2. Forge and sustain communications with the early-stage investment 
community. 

a. Host a recurring event for venture capital investors to meet with 
senior EPA officials, including the EPA Administrator, the Assistant 
Administrator for Research and Development, the EPA Science 
Advisor, the EPA Laboratory/Center Directors, the Senior 
Environmental Technology Officer, and the Regional Environmental 
Technology Advocates, and announce EPA's commitments to 
developing new technologies to solve environmental problems. 

b. Host open, accessible events that facilitate communication and 
dialogue among aspiring technology developers, investors, EPA, 
other regulatory bodies, and partners and reflect EPA objectives. 

c. Encourage headquarters program and regional office officials to 
attend investor and new technology events sponsored by organi¬ 
zations such as: 

■ Angel Capital Association 

■ National Venture Capital Association 

■ National Association of Seed and Venture Funds 

■ National Business Incubator Association 

d. Encourage EPA managers, scientists, and engineers at all levels to 
engage with new technology developers and investors, including 
personal visits to early-stage firms, particularly those developing 
and commercializing technologies funded by venture capitalists. 

e. Establish a Technology Investment Advisory Board, as an inde¬ 
pendent advisory body or a standing committee of NACEPT or the 
EFAB. 

f. Encourage the Environmental Technology Council and Action 
Teams to invite the investment community to participate in discus¬ 
sions of desired technologies. 


Protect and improve the air so it is healthy to breathe and risks to human health and the environment are reduced. 
Reduce greenhouse gas intensity by enhancing partnerships with business and other sectors." Goal 1. Clean Air and 
Global Climate Change. U.S. Environmental Protection Agency. 2006-2011 Strategic Plan: Charting Our Course EPA- 
190-R-06-001. Washington, DC. 2006. Available at http://www.epa.gov/ocfo/plan/plan htm 







3. Strengthen financial support (e.g., loan guarantees, grants, revolving loan 
funds) and reduce regulatory risks for new technology development dur¬ 
ing the commercialization period. 

a. Fully fund the SBIR Program beyond the mandatory 2.5 percent of 
the R&D budget level and include an additional 1 percent for 
commercialization support. Also encourage co-funded SBIR grants 
with other federal agencies. 

b. Establish closer SBIR partnering relationships among EPA program 
and regional offices to share financial and technical support for 
adoption of SBIR technologies. 

c. Increase the funding and scope of EPA's Environmental 
Technology Verification Program. 

d. Implement flexible enforcement requirements that allow use of 
emerging new technologies that have been verified under EPA's 
ETV Program. 

e. Provide loan guarantees to new technology companies. 

f. Increase EPA laboratory research funding by 20 percent annually 
and designate this funding to specifically support technologies 
that can be commercialized. 

g. Offer research grants to colleges and universities to pursue com¬ 
mercialization of technical solutions to solve specific EPA technolo¬ 
gy challenges. 

h. Substantially increase the number of CRADAs that EPA laboratories 
establish with private-sector partners. Fund grants for demonstra¬ 
tion, pilot testing, and initial commercial deployment of technolo¬ 
gies related to addressing climate change concerns. 

4. Take steps to streamline permitting for commercial scale-up of new, inno¬ 
vative environmental technologies. 

a. Issue policy for streamlining the permitting process for commercial 
scale-up of new, innovative environmental technologies to 
encourage capitalization for taking these new clean technologies 
to commercial scale. During this commercialization phase, stream¬ 
lined permitting and consistent enforcement become increasingly 
important. 

b. Seek opportunities to work with regions, states, tribes, and munici¬ 
palities to pilot a streamlined permitting process to address priority 
problems. Such an approach was used by Region 1 's Center for 
Environmental Industry and Technology in collaboration with the 
Interstate Technology and Regulatory Council to address septic 
systems, arsenic removal technologies, and site characterization. 

5. Enforce environmental regulations consistently, to clarify needs and avoid 
uncertainty. 

a. Establish long-term regulations to reduce regulatory risk in a timely 
manner. When environmental regulations are reliably enforced, 
investors are able to gauge the potential market for new technolo¬ 
gy penetrations. 

b. Maintain a vigorous enforcement policy and drive technology 
through laws and regulations; this reduces uncertainty in the mar¬ 
ketplace. 


O 






6. Support metrics and monitoring of new technologies. 

a. Develop an EPA capability to verify the effectiveness of new envi¬ 
ronmental technologies. 

b. Develop an EPA capability to verify the effectiveness of clean 
technologies; objectively validate the net environmental benefit of 
a technology adoption. 

c. Expand and promote the Environmental Technology Verification 
Program. 

d. Implement a recognition program for technologies that are suc¬ 
cessfully validated in a metrics and monitoring program, and/or 
are successfully validated by EPA's ETV Program. 

Additional Recommendations 

The following additional recommendations will further spur EPA support for 
environmental technology development and commercialization. 

1. Establish and promulgate management and policy changes within EPA to 
encourage internal support for new technology development. 

a. Publicly announce appointments of the EPA Senior Environmental 
Technology Officer and Regional Environmental Technology 
Advocates. 

b. Use internal and external communication mechanisms to recog¬ 
nize successful technology adoptions throughout EPA. 

c. Encourage the Environmental Technology Council and Action 
Teams to invite the investment community to participate in discus¬ 
sions about technology development and commercialization 
issues. 

d. Recognize and reward EPA employees responsible for solving envi¬ 
ronmental problems through successful new technology applica¬ 
tions. 

e. Create incentives for EPA research laboratories to support the 
development and commercialization of environmental technolo¬ 
gies arising from EPA research. 

2. Increase public advocacy for new technology. 

a. Announce EPA interests to identify possible technology solutions to 
address high-priority environmental problems. Publish and maintain 
an active list of specific problems for which new technology solu¬ 
tions are sought. 

b. Establish policy advocating support for innovative technology 
approaches to solve the most critical environmental problems. 

c. Publicly advocate for new technologies that solve environmental 
problems; communicate the sense of urgency for new technolo¬ 
gies development and use. 

d. Use the EPA Science Forum as an opportunity to review new tech¬ 
nology initiatives and to recognize EPA staff and partners for tech¬ 
nology achievements. 

e. Create a public electronic database of successful new environ¬ 
mental technologies. 

f. Establish a Web-based "clearinghouse" or database that serves as 
a referral service for technology investment opportunities and 
challenges. 


O 




g. EPA should provide technical and economic information so that 
companies can overcome the initial hurdles to investing in innova¬ 
tive technologies. EPA also should provide technical and eco¬ 
nomic information so that investors do not overinvest in a particular 
technology. 

3. Use collaborative relationships and partnerships to further public funding 
and private investment in technology development. 

a. Increase collaborative technology development programs by 
active partnerships with federal agencies, states, tribes, and other 
stakeholder organizations, including industry organizations. 

b. Work with federal and state agencies to provide access and sup¬ 
port for technology demonstrations and pilot programs on federal 
facilities, including military facilities being converted for other uses 
through the Base Realignment and Closure (BRAC) program. 

4. Model EPA technology support activities after other successful programs. 

a. Adopt technology development programs demonstrated effective 
by the DOE national laboratories. 

b. Address Intellectual Property Rights issues for government 
researchers. The government should find some way to allow these 
researchers to share in invention royalties. 

c. Link EPA laboratories with business incubators, other entrepreneur¬ 
ial development organizations, and the investment community. 

d. Open EPA laboratories to visits by venture capitalists to allow them 
to learn about technology developments and establish a relation¬ 
ship that could result in future co-investments. 

e. Establish an Entrepreneur-in-Residence program at EPA laborato¬ 
ries similar to that underway at three DOE national laboratories. 

f. Investigate and coordinate with technology development and 
investment programs in other countries and consider adopting the 
most successful approaches to improve technology development 
in the United States. 

5. Clearly state technology development and commercialization objectives. 

a. Include technology development objectives in the EPA Strategic 
Plan as well as the Agency's other plans. 

B. Recommendations for the Venture Capital Community ■■■■ 

1. Collaborate with EPA to establish metrics and monitoring strategies for 
new technologies to measure and document demonstrated actual per¬ 
formance of these technologies. 

a. Consider metrics and monitoring measurements to document the 
effectiveness of new technologies. 

b. Collaborate with EPA to see that the performance measurements 
address metrics that are related to anticipated regulations and 
standards. 


O 





2. Participate in environmental technology verification programs and EPA- 
supported metrics and monitoring programs. 

a. Consider EPA SBIR-sponsored technologies for potential invest¬ 
ments. 

b. Use industry and investment community networks to promote SBIR 
solicitations and awards, and advise SBIR recipients where addi¬ 
tional funding may be available. 

c. Serve on an EPA advisory committee focused on SBIR activities. 

d. Encourage investment companies to participate in EPA's 
Technology Verification Program. 

e. Collaborate with EPA to develop and implement metrics and mon¬ 
itoring programs relevant to new technologies. 

3. Encourage communication and interaction among technology develop¬ 
ers, investors, and EPA. 

a. Sponsor Entrepreneur-in-Residence (EIR) programs for possible 
application in the EPA laboratories. Potential "pools" of entrepre¬ 
neurs could be identified and vetted through partnerships with pri¬ 
vate-sector organizations. 

b. Support private-sector organizations for EIR partnerships, which 
could include: non-profit organizations such as the New England 
Clean Energy Coalition, venture capital firm(s), or national trade 
associations such as the National Venture Capital Association, the 
National Association of Small Business Investment Companies, and 
others. 

c. Alert EPA officials to venture capital investment considerations to 
better understand commercialization opportunities for environmen¬ 
tal technologies. 

d. Meet with the Senior Environmental Technology Officer (SETO) and 
other EPA officials in Washington, DC, to discuss venture capital 
investments in clean technologies. 

e. Meet with the EPA Regional Technology Advocates and other 
regional officials to maintain mutual awareness of new technolo¬ 
gies. 

f. Invite EPA officials to visit environmentally beneficial venture capi¬ 
tal sponsored technology demonstrations. 

g. Invite EPA officials to participate in investment organization confer¬ 
ences and events, h. Participate in EPA advisory boards, councils, 
and committees. 

4. Provide opportunities for EPA to financially support promising new envi¬ 
ronmental technologies through existing and new financial support pro¬ 
grams. 

a. Propose loan guarantees or grant approaches that would 
enhance investments in environmental technologies. 

b. Encourage firms to seek funding support through EPA's SBIR 
Program and verification support through EPA's ETV Program. 

c. Introduce EPA to market mechanisms that would allow regulators 
and investors to work together to address high-priority environmen¬ 
tal problems (e.g., the joint meetings among the California 
Environmental Protection Agency (CalEPA), the California Public 
Utilities Commission (CPUC), and CalPERS that have been con¬ 
ducted for the past 2 to 3 years to address California energy and 
environmental issues). 






Appendix A: Venture Capital Work Group Members 


Work Group Members from the 
Environmental Technology 
Subcommittee 

Phil Helgerson 

Subcommittee and Work Group Chair 

Computer Sciences Corporation 

1201 M Street SE, Suite 400 

Washington, DC 20003 

Tel: 202-675-8543 

Fax: 202-547-5891 

E-mail: phelgerson@csc.com 

Dan Watts, Ph.D. 

NACEPT Council Liaison 
Executive Director 

Otto H. York Center for Environmental 
Engineering & Science 
New Jersey Institute of Technology 
University Heights 
Newark, NJ 07102-1982 
Tel: 973-596-3465 
E-mail: watts@njit.edu 

John Hornback 

Executive Director 

Metro 4, Inc. and Southeastern States 
Air Resource Managers, Inc. 

526 Forest Pkwy, Ste F 
Forest Park GA 30297-6140 
Tel: 404-361-4000 
Fax: 404-361-2411 
Cell: 770-605-3059 

E-mail: hornback@metro4-sesarm.org 

Robin Newmark, Ph.D. 

Director, External Relations 
Global Security Principal Directorate 
Lawrence Livermore National 
Laboratory 
L-640 PO Box 808 

7000 East Ave, Livermore, CA 94550 
Tel: 925-423-3644 
Fax: 925-423-6305 
E-mail: newmarkl@llnl.gov 

Karen Riggs 

Battelle Memorial Institute 
Advanced Monitoring Systems Center 
Columbus, OH 
Tel: 614-424-7379 
E-mail: riggsk@battelle.org 


Work Group Members Not from 
the Environmental Technology 
Subcommittee 

R. Andrew de Pass 

Managing Director & Head of 
Sustainable Development 
Investments 

Citi Alternative Investments 
731 Lexington Avenue, 27 th Floor 
New York, NY 10022 
Tel: 212-783-1106 

E-mail: r.andrew.depass@citi.com 

Bryan Martel 

Managing Partner 
Environmental Capital Croup LLC 
355 Crown Point Circle, Suite D 
Grass Valley, CA 95945 
Tel: 530-274-1191 

E-mail: bryan@environmentalcapital- 
group.com 

Frank McGrew, IV 

Managing Director 

Morgan Joseph & Company, Inc. 

102 Woodmont Boulevard, Suite 450 
Nashville, TN 37205-2287 
Tel: 615-238-2308 (office) 

615-364-3720 (cell) 

Fax: 615-238-2301 

E-mail: FMcGrew@morganjoseph.com 

John Preston 

Senior Lecturer 
MIT Entrepreneurship Center 
One Amherst Street, E40-196 
Cambridge, MA 02142 
Tel: 508-324-6411 (office) 

617-306-5759 (cell) 

Fax: 508-324-6401 
E-mail: preston@mit.edu 

John Wise 

EPA Environmental Financial Advisory 
Board (EFAB) Liaison 
20591 Honey Hill Rd 
Hidden Valley Lake, CA 95467 
Tel: 510-501-5374 (cell) 

707-987 -3742 (home) 

E-mail: jcwise@mchsi.com 


O 






EPA Staff 

Mark Joyce 

Designated Federal Officer 
Associate Director 

Office of Cooperative Environmental 
Management 

U.S. Environmental Protection Agency 
(1601M) 

1201 Constitution Avenue NW 
Washington, DC 20004 
Tel: 202-564-2130 
Fax: 202-564-8129 
E-mail: joyce.mark@epa.gov 

Paul Shapiro, Project Officer 
Senior Environmental Engineer 
National Center for Environmental 
Research 

Office of Research and Development 
U.S. Environmental Protection Agency 
(8722F) 

1200 Pennsylvania Avenue, NW 

Washington, D.C. 20024 

Tel: 202-343-9801 

Fax: 202-233-0678 

E-mail: shapairo.paul@epa.gov 

Sally Gutierrez 

Director 

National Risk Management Research 
Laboratory 

Office of Research and Development 
U.S. Environmental Protection Agency 
(MC 235) 

26 West Martin Luther King Drive 
Cincinnati, OH 45268 
Tel: 513-569-7683 
E-mail: gutierrez.sally@epa.gov 

Teresa Harten 

Chief, Environmental Technology 
Assessment and Verification Staff 
National Risk Management Research 
Laboratory 

Office of Research and Development 
U.S. Environmental Protection Agency 
(MC 208A) 

26 West Martin Luther King Drive 
Cincinnati, OH 45268 
Tel: 513-569-7565 
E-mail: harten.teresa@epa.gov 


Maggie Theroux 

Environmental Technology Assessment 
and Verification Staff 
National Risk Management Research 
Laboratory 

Office of Research and Development 
U.S. Environmental Protection Agency 
(SPP) 

Tel: 617-918-1613 

E-mail: theroux.maggie@epa.gov 


Support Contractor—Scientific 
Consulting Group, Inc. (SCG) 

Beverly Campbell 

President 

The Scientific Consulting Group, Inc. 

656 Quince Orchard Road, Suite 210 

Gaithersburg, MD 20878 

Tel: 301-670-4990 

Fax: 301-670-3815 

E-mail: bcampbell@scgcorp.com 

Gregory Ondich, Ph.D. 

The Scientific Consulting Group, Inc. 

656 Quince Orchard Road, Suite 210 

Gaithersburg, MD 20878 

Tel: 301-670-4990 

Fax: 301-670-3815 

E-mail: gondich@scgcorp.com 

Andrew Paterson 

Subcontractor to SCG 
Director, Economics & Finance 
Consulting/North America 
Econergy International 
1850 M Street, Suite 1050 
Washington, DC 20007 
Tel: 202-822-4980 x311 (office) 
619-807-3267 (cell) 

Fax: 202-822-4986 

E-mail: adpaterson@econergy.com 


0 




Appendix B: Charge to the Work Group 


Charge to the Venture Capital Work Group of 
the NACEPT Subcommittee on Environmental Technology 

I. Reasons for the Study 

The Subcommittee in its first report, EPA Technology Programs and Intra- 
Agency Coordination, May 2006, which can be found on www.epa.gov/etop, 
developed the EPA Environmental Research and Development Continuum. The 
Continuum shows that EPA does not have programs that support the commer¬ 
cialization of technology. This means that environmental technologies devel¬ 
oped by EPA and by others with and without EPA support must largely rely on 
funding from the private sector if they are to be commercialized and used to 
protect public health and the environment. 

In its second report, EPA Technology Programs: Engaging the Marketplace, 
May 2007, also available on the ETOP, the Subcommittee emphasized the need 
for EPA to partner with outside organizations to develop and commercialize envi¬ 
ronmental technologies, and to help put them into use. This means that EPA 
should work with the private sector to find ways to increase investment in the 
commercialization of environmental technologies. 

As a result, EPA wants to open communication with the investment communi¬ 
ty to get its advice on actions that EPA and the investment community could 
take and partnerships they could create to achieve the goal of greater private 
sector investment in the commercialization of environmental technologies over 
the long-term. 

II. Content of the Study 

The study should address the following questions: 

A. Current Investment Practices. What is the nature of current private sector 
investment in environmental technology? Who are the investors? How do they 
differ in their investments? How much are they currently investing? How do 
investors and developers find each other? How do investors manage their invest¬ 
ments? How do they judge the success of their investments? Give examples of 
successful investments by different types of investors in environmental technology. 

B. Future Investment. What are the prospects for investment in environmen¬ 
tal technology in the future? What are the determinants of this prospective 
future? What sectors or applications of environmental technology will be likely to 
attract investment and why? What is the likely magnitude of these investments? 
Are there likely to be new or improved mechanisms to help investors and devel¬ 
opers find each other? What is hindering and helping the development of dedi¬ 
cated environmental funds? What could industry do—either by itself or with EPA 
as a partner to enhance investment in environmental technology? 

C. Current EPA Role. To what extent and how is EPA a factor in current 
investment decisions? When have EPA regulations helped and hindered invest¬ 
ment (give examples)? Do EPA voluntary programs lead to investment (give 
examples of those that work)? What is the role of technology assessment and 








verification in making investment decisions? To what extent is there contact with 
EPA—e.g., Regional Offices, program offices, research office—and for what pur¬ 
poses? To what extent are investors aware of EPA-developed technologies? 

How do they find out about them? What is EPA doing that helps and hinders 
investment in those technologies? Does the industry have successful interactions 
with other Federal agencies from which EPA could learn? Do those Agencies 
have programs or policies that EPA could emulate or partner with? If so, what 
are they and how could EPA best make use of them? 

D. Future EPA Role. What can EPA do to make investment in environmental 
technology more attractive and to facilitate that investment? Would it be help¬ 
ful for EPA to communicate its priority environmental problems? What would be 
the most effective and efficient communication mechanisms between EPA and 
the industry—with whom and for what purposes? Are their barriers that EPA can 
remove to encourage investment? Are there actions EPA can take to facilitate 
investment? What kinds of long-term partnerships between EPA and the invest¬ 
ment community would be useful—with whom, for what purposes, and using with 
what mechanisms? 

III. Process for Carrying Out the Study 

The Subcommittee is being asked to create a small work group consisting of 
members of the Subcommittee and members of the investment community. The 
work group will meet by teleconference and conduct its work by telephone and 
email, unless otherwise specified by EPA. 

The work group members will use existing reports about investment in environ¬ 
mental technology, their own experience, and contacts with knowledgeable 
people in the investment community to gather, analyze, and write up contextual 
and background information on venture capital investment in environmental 
technology. This material will inform the work group's discussions and can be 
used in the work group's report both as part of the text and in an appendix. 

The work group will conduct structured interviews of no more than nine indi¬ 
viduals who comprise an informed group of venture capitalists and others with 
complementary experience and knowledge of investment in environmental 
technology. The work group, with EPA support, will design and do a limited pre¬ 
test of the questionnaire that will be used for these interviews. 

The product of this work group will be a letter report to the EPA Administrator 
that gives background, findings, and recommendations. It is not expected that 
this report will be bound, but that will depend on its length and other considera¬ 
tions at the time of its completion. 

It will be useful to have at least one early draft of the outline and initial infor¬ 
mation and thoughts reviewed by the Subcommittee by January 15, 2008. The 
work group must complete it final report, including obtaining Subcommittee 
approval, by March 30, 2008. 


O 





Appendix C: Venture Capital Community Interviewees 


Interviewee 

Affiliation 

Capital Under 
Management 

Rob Day 

@Ventures 

$100 million 

John DeVillars 

BlueWave Strategies 

$2 million 

Hank Habicht 

SAIL Venture Partners 

$170 million 

Winston Hickox 

California Strategies 

Not Applicable 

Kef Kasdin 

Battelle Ventures 

$220 million 

Eric McAfee 

Cagan-McAfee-Capital Partners 

$500 million 

Chuck McDermott 

RockPort Capital Partners 

$386 million 

William Reilly 

Aqua International Partners/ 

Texas Pacific Group 

$1,500 million 

Rosemary Ripley 

NGEN Partners 

$250 million 

TOTAL CAPITAL UNDER MANAGEMENT 

$3.13 billion 


Interviewee Biographical Sketches ■■■ 

Rob Day, Principal, @Ventures 
www. ventures, com 

Rob Day, joined @Ventures in 2007, and operates out of the company's 
Boston-area office. He currently holds an observer seat on the boards of Powerit 
Solutions and M2E Power. 

Prior to joining the @Ventures team, Mr. Day was an investor with Expansion 
Capital Partners for more than 2 years, where he was an investment principal 
responsible for various aspects of that firm's clean technology venture capital 
activities, including investments in Tiger Optics, SensorTran, and Orion Energy 
Systems. 

Mr. Day was formerly a consultant with Bain & Company, where he worked 
with companies and evaluated private equity transactions in the energy/utilities, 
telecommunications, information technology, health care, and retail industries. 
Earlier in his career, Mr. Day was a founding member of the World Resources 
Institute's Sustainable Enterprise Program, where he developed partnerships with 
companies across a wide range of industries to foster new business opportunities 
with economic, environmental, and social benefits. 

Mr. Day is the co-author of The Next Bottom Line: Making Sustainable 
Development Tangible, co-leads the Renewable Energy Business Network 
(www.rebn.org), and authors the Web site Cleantech Investing (www.clean- 
techvc.com). Mr. Day also serves on the boards of the New England Clean 
Energy Council and GreenTech Media. Mr. Day received his M.B.A. at Kellogg 
Graduate School of Management (Northwestern University), and his B.A. at 
Swarthmore College. 



























John DeVillars, Partner, BlueWave Strategies 
www. bluewavestrategies. com 

John DeVillars is a Founder and Partner of BlueWave Strategies and 
Managing Partner of its affiliated investment group, BlueWave Capital. He cur¬ 
rently advises Brownfield developers and environmental and renewable energy 
companies in the areas of project management, financing and capital sourcing, 
regulatory approvals, community and government relations, and business devel¬ 
opment. 

From 2000 to 2003, Mr. DeVillars served as the Executive Vice President of 
Brownfields Recovery Corporation, a Boston-based real estate investment and 
development company that focuses on environmentally impaired properties. 
From 1994 to 2000, he served as the New England Administrator of the U.S. 
Environmental Protection Agency. Previously, Mr. DeVillars served as Secretary of 
Environmental Affairs for the Commonwealth of Massachusetts, Chairman of the 
Board of the Massachusetts Water Resources Authority, and Chief of Operations 
for Massachusetts Governor Michael Dukakis. From 1991 to 1994, he was Director 
of the Environmental Services Group for Coopers & Lybrand, where he initiated 
and led the firm's environmental management systems group. 

Mr. DeVillars holds an M.P.A. from Harvard University and a B.A. from the 
University of Pennsylvania. He serves on the Board of Directors of Clean Harbors, 
Inc., and the Massachusetts Environmental Trust as well as several other privately 
held energy and environmental corporations and nonprofit organizations. 

Hank Habicht, Managing Partner, SAIL Venture Partners 
www.sailvc.com 

Hank Habicht joined SAIL Venture Partners in 2005 and works in the compa¬ 
ny's Washington, DC office. Mr. Habicht is the Chief Executive Officer for the 
Global Environmental & Technology Foundation (GETF), a 501 (c)3, not-for-profit 
corporation that fosters innovation in environmental management and applica¬ 
tions of clean technology that make business and environmental sense. He is the 
Co-founder and Principal in Capital E, LLC, a management consulting firm that 
works with energy technology companies in areas such as solid oxide fuel cells, 
photovoltaic modules, combined heat and power projects, and bio-energy 
plants. 

Previously, Mr. Habicht was Senior Vice President of Safety-Kleen, and served 
as Deputy Administrator and Chief Operating Officer at the U.S. Environmental 
Protection Agency. He is a co-founder of the American Council on Renewable 
Energy and an advisor to the Secretary of the U.S. Department of Energy. Mr. 
Habicht received his bachelor's degree from Princeton and a law degree from 
the University of Virginia. 






Winston Hickox, Partner, California Strategies, LLC 
www. calstrat. com 


Winston Hickox joined California Strategies, LLC, as a Partner in 2006. He has 
extensive experience in environmental policy and regulation as well as public 
finance, including pension fund investment management. His state environmen¬ 
tal policy experience includes 5 years as Secretary of the California 
Environmental Protection Agency (CalEPA); 7 years as a Special Assistant for 
Environmental Affairs to California Governor Jerry Brown; and 2 years as an alter¬ 
nate to the California Coastal Commission, appointed by the California Speaker 
of the Assembly. 

Mr. Hickox recently completed a 2-year assignment with the California Public 
Employees' Retirement System (CalPERS) Investment Office where he assisted 
with the design and implementation of a series of Environmental Investment 
Initiatives in the Private Equity, Real Estate, Global Public Equity, as well as 
Corporate Governance segments of the fund's $211 billion investment portfolio. 

In 2004, he was elected to the boards of Audubon California and Sustainable 
Conservation. In 1998, the Sacramento County Board of Supervisors appointed 
him to the Board of the $5 billion Sacramento County Employees' Retirement 
System (SCERS); he was recently appointed to another 3-year term. 

From 1987 to 1996, Mr. Hickox was a Managing Director and Partner with 
LaSalle Investment Management, a major force in the world's real estate capital 
markets, and at that time the largest manager of CalPERS real estate assets. 

Kef Kasdin, General Partner, Battelle Ventures 
www. battelleventures. com 

Kef Kasdin is a General Partner at Battelle Ventures and Innovation Valley 
Partners, where she focuses primarily on investments in communications and 
emerging energy technologies. She currently serves on the Boards of Directors of 
Aldis, Inc.; Multispectral Imaging, Inc.; Planar Energy Devices, Inc.; and Rajant 
Corp. 

Ms. Kasdin has been involved in developing and executing strategy for high- 
technology companies for more than 20 years. In the 1990s, she held a number 
of positions of increasing importance at 3Com Corporation in Santa Clara, 
California. Among the titles she held at 3Com were: Vice President of Marketing, 
Desktop Products Division and Vice President and General Manager of the $1-bil¬ 
lion Ethernet Products Division. In the fall of 1998, Ms. Kasdin was named 3Com's 
first Executive in Residence, Office of the Chairman, driving key strategic and 
operational initiatives for the company. 

At the close of the decade, Ms. Kasdin moved to New Jersey and was a busi¬ 
ness and marketing consultant to a dozen technology start-ups. One of her key 
clients was Sarnoff Corporation, where she worked closely with senior executives 
to identify spinout opportunities and areas for future investment. 

Early in her career, Ms. Kasdin was a consultant with Booz, Allen and Hamilton 
in San Francisco, California. She received a B.S.E degree in Operations Research 
from Princeton University in 1985, and an M.B.A. from the Graduate School of 
Business, Stanford University, in 1989. 


0 






Eric McAfee, Managing Director, Cagan McAfee Capital Partners 
www. cmcp. com 

Eric McAfee is an entrepreneur, venture capitalist, and merchant banker, 
who has founded 11 companies in renewable energy, oil and gas, networking, 
and software. During the past 9 years, he has invested in more than 20 compa¬ 
nies through Berg McAfee Companies, a holding company. Mr. McAfee is the 
founding shareholder of six companies that were taken public, and also took five 
of the Cagan McAfee portfolio companies public via merger. The aggregate 
value of public companies Mr. McAfee has founded or participated in building is 
in excess of $4 billion measured by combined high market capitalizations. 

AE Biofuels is an example of Mr. McAfee's involvement in clean technology 
development. He is the Founder, Executive Chairman, and former Chief 
Executive Officer of AE Biofuels, an ethanol and biodiesel company focused on 
the development of 2 billion gallons of ethanol production in Nebraska and 
Illinois, and 800 million gallons of biodiesel production in the United States and 
India. AE Biofuels was founded by Mr. McAfee in 2005 and taken public in mid- 
2006. 

In 1986, Mr. McAfee graduated as the Dean's Medalist from the Fresno State 
University (FSU) Business School. He lectured as the 2001 Entrepreneur-in- 
Residence at FSU and earned the Business School Alumni of the Year Award in 
2002. Mr. McAfee is a 1993 graduate of the Stanford Graduate School of Business 
Executive Program, and completed the Harvard Business School Private Equity 
and Venture Capital Program. 

Chuck McDermott, General Partner, RockPort Capital Partners 
www. rockportcap. com 

Chuck McDermott began working in the energy and environmental area in 
1984, when he joined Citizens Energy Corporation as Manager of Project 
Development, helping to pioneer the creation of the nation's first bulk electric 
power trading company. He later served as Campaign Director and then as 
Chief of Staff for a U.S. Congressman from 1986-1990, directing all political, con¬ 
stituent, and legislative matters. In 1990, Mr. McDermott joined the government 
relations staff of Waste Management, lnc„ the world's largest environmental serv¬ 
ices company, and was made Vice President and Corporate Officer in 1993 
responsible for the company's federal advocacy before the White House, U.S. 
Congress, and federal agencies. He relocated to Boston in 1998, and helped 
form RockPort's Merchant Bank in that year and the venture fund in 2001. 

He currently serves on the Boards of Directors of Advanced Electron Beams, 
Renaissance Lighting, Soliant Energy, and Tioga Energy. He also is a Member of 
the Board of Directors and President of the Coalition to Advance Sustainable 
Technologies, a member of the Board of Advisors to the Cleantech Venture 
Network, Chairman of the Gridwise Alliance, and Board Member of the Flax Trust, 
a business incubator in Belfast, Northern Ireland. 

Mr, McDermott studied at Yale University before becoming a producer, per¬ 
former, writer, and music company executive, recording three albums, and 
founding Homecoming Records with John Stewart in 1982. 


0 





William Reilly, Founding Partner, Aqua International Partners 
www. texaspacificgroup. com 


William K. Reilly is a Founding Partner of Aqua International Partners, LP, a pri¬ 
vate equity fund dedicated to investing in companies engaged in water and 
renewable energy, and a Senior Advisor to TPG Capital, LP, an international 
investment partnership. Mr. Reilly served as the first Payne Visiting Professor at 
Stanford University (1993-1994), Administrator of the U.S. Environmental Protection 
Agency (1989-1993), President of the World Wildlife Fund (1985-1989), President of 
The Conservation Foundation (1973-1989), and Director of the Rockefeller Task 
Force on Land Use and Urban Growth from (1972-1973). He was head of the U.S. 
delegation to the United Nations Earth Summit at Rio in 1992. 

Mr. Reilly is Chairman Emeritus of the Board of the World Wildlife Fund, Co- 
Chair of the National Commission on Energy Policy, Chair of the Advisory Board 
for the Nicholas Institute for Environmental Policy Solutions at Duke University, 

Chair of the Board for the Global Water Challenge, and a Director of the 
Packard Foundation, the American Academy in Rome, and the National 
Geographic Society. He also serves on the Board of Directors of DuPont, 
ConocoPhillips, and Royal Caribbean International. In 2007, Mr. Reilly was elect¬ 
ed to the American Academy of Arts and Sciences. He holds a B.A. degree from 
Yale University, a J.D. from Harvard, and an M.S. in Urban Planning from Columbia 
University. 

Rosemary Ripley, NGEN Partners 
www. ngenpartners. com 

Rosemary Ripley was asked to be a Member of NGEN in 2007. She joined 
NGEN as an Entrepreneur-in-Residence in 2006 and shortly thereafter joined the 
Board of EnviroTower. Ms. Ripley brings to NGEN substantial experience in strate¬ 
gic planning, acquisitions, and public and private market transactions. 
Responsible for corporate business development at Altria Group (previously Philip 
Morris Companies) from 1990-2005, Ms. Ripley helped spearhead and execute 
numerous expansionary growth plans for the operating companies. She led 
teams that invested heavily in Central and Eastern Europe and Asia and trans¬ 
formed Kraft Foods with the $19 billion acquisition of Nabisco and subsequent 
$8.5 billion initial public offering. Ms. Ripley also developed the strategy and led 
the transformation of Miller Brewing Company from a domestic business to part of 
an international enterprise with the merger with South African Breweries. 

Prior to joining Altria, Ms. Ripley was a Managing Director at Furman Selz, 
responsible for the Retail and Consumer Group, and prior to that she was a Senior 
Investment Banker at L.F. Rothschild, Unterberg, Towbin, where she also ran the 
Retail and Consumer Group. 

Ms. Ripley has been an active individual investor for years and co-found- 
ed Circle Financial Group, a multi-family office in 2004. Ms. Ripley received both 
her B.A., cum laude, and M.B.A. at Yale University. 





Appendix D: Pre-Interview Instrument 


Background & Purpose of the Study 

The U.S. Environmental Protection Agency (EPA) Office of Research and 
Development (ORD) wants to open communication with the investment commu¬ 
nity. Through this communication, EPA wants to get its advice on actions the 
Agency and the investment community could take and partnerships they could 
create to achieve greater private sector investment in the commercialization of 
environmental technologies (ET) over the long-term. 

EPA has charged the National Advisory Council for Environmental Policy and 
Technology (NACEPT) through its Subcommittee on Environmental Technology to 
create a Work Group to carry out a Venture Capital Study. The Subcommittee 
has previously submitted to the Agency two reports—EPA Technology Programs 
and Intra-Agency Coordination (May 2006) and EPA Technology Programs: 
Engaging the Marketplace (May 2007), which may be viewed at 
www.epa.gov/etop. One of the key findings of the first report was that EPA has 
no programs specifically directed at commercialization of innovative technolo¬ 
gies. One of the main recommendations of the second report was that EPA 
should partner with the venture capital community to increase private sector 
investment in the commercialization of environmental technology. ORD is seek¬ 
ing guidance for that effort through this Venture Capital Study. 

Process 

1. The following pre-interview instrument is divided into four parts: A. Current 
Investment Practices; B. Future Investment Outlook; C. EPA Activities; and 
D. Open-ended Questions. At least 3 days before the interview, we are 
asking each interviewee to rate items identified under Parts A, B, and C 
and return these ratings by e-mail or by fax to Andy Paterson, Econergy 
(contact information provided in #5 below). Part D. Open-ended 
Questions are offered as guides to identify the areas that will be discussed 
during the telephone interview. 

2. We realize that you may have more to say in response to certain ques¬ 
tions than others; that is okay, we will concentrate on the ones where you 
are most knowledgeable. Feel free to tell us if we have missed important 
issues that we should discuss with you. 

3. We will make rough transcriptions of each interview. These will be for use 
only by members of the Work Group. You will not be directly quoted in 
the Work Group report. 

4. We will give you an opportunity to review the Work Group's report to see 
if your views are accurately reflected; however, the report must be sub¬ 
mitted to the Subcommittee before March 31, 2008. 

5. If you have any thoughts, questions, or useful information for us before or 
after the interview, please contact Andrew Paterson (Econergy) at TEL: 
(202) 822-4980; FAX: (202) 822-4986; E-mail: adpaterson@econergy.com or 
the EPA ORD Work Assignment Manager for this project, Paul Shapiro 
(EPA/ORD) at TEL: (202) 343-9801; E-mail: shapiro.paul@epa.gov. 







Interviewee: 

Name:__Fund/Firm:_ 

HQ Locale: __Phone: _ 

Capital Under Mgmt: $_million Capital Available to Invest: $ • million 

■ A. Current Investment Practices 1 

ID #_ 


1. Overall “Attractiveness” of Environmental Technology (ET) Market Segments 

Rate overall "attractiveness" for each area according to the following scale: 1 = not attractive 
at all; would sell out of it, and would not recommend pursuing this sector to others; 2 = not as 
attractive as other segments; not pursuing; 3 = simply on par with other technology segments we 
are reviewing; 4 = attractive niche; distinctive market and competitive traits for venture invest¬ 
ment; 5 = very attractive segment; actively reviewing and seeking investments 


Rate: General ET segments (rate "attractiveness" based on scale above') 

_ Monitoring and assessment technologies 

_ Pollution prevention and control 

_ Remediation and restoration technologies 

_ Renewable or clean energy technologies and systems 


Rate: Cleantech ET subsegments, excluding energy Crate based on scale above") : 

_ Agriculture (i.e., natural pesticides, land management, and aquaculture) 

_ Air pollution control (cleanup, emissions control, monitoring - SOx, NOx, Hg, 

PM) 

_ Low carbon projects, carbon offsets, monitoring technology for C02, green¬ 
house gases (GHGs) 

_ Manufacturing and industrial (advanced packaging, smart or "green" pro¬ 
duction) 

_ Materials and industrial efficiency (i.e., "nanotech", biomaterials, chemicals) 

_ Recycling and hazardous or solid waste treatment 

_ Water & wastewater (water treatment, conservation, and wastewater treat¬ 
ment). 

2. Factors Affecting Attractiveness of Environmental Technology Segments 

Rate using: 1 = strongly Disagree; 2=disagree; 3=maybe; 4=agree; 5=strongly Agree 
Note: Factors affecting attractiveness are stated in a negative voice because the premise of 
the survey is that environmental technologies historically have failed to garner significant levels 
of investment. 


Technology Factors / Challenges 

_ Venture capital investment in ET (versus "clean energy") lags its potential. 

_ The EPA R&D budget is not at a level that can move ET to market effectively. 
Private industry funding of R&D in ET is inadequate, limiting innovative poten¬ 
tial. 

_ Interaction between private industry and government environmental R&D 

programs and EPA Labs for commercializing ET must be improved (e.g„ 
more resources, better focus, etc.). 

_ The rigor of intellectual property protection in ET, in general, lags other tech¬ 
nology areas. 

_Linkage between industry and permitting is weak. 


Tf^crnples of cleantech or clean technologies that include both environmental and energy technology segments are 
attached. This definition was created by the Cleantech Group, LLC. 



































_ Third-party verification programs, such as the EPA ORD Environmental 

Technology Verification Program, do not provide information or results that 
are valuable enough to affect investment decisions. 

_ Engineering firms as users of ET lack real incentives to promote adoption of 

new technology. 

_ ET lacks a level of "technology breakthroughs" that merit venture investment 

attention. 

Market Factors / Challenges 

_ Market growth for ET is low or less attractive than other venture technology 

sectors. 

_ Market growth for ET is lower or less attractive relative to renewable energy 

deals. 

_ While markets for upgrading water infrastructure and treatment might be 

promising, public and private spending is not growing fast enough for ven¬ 
ture financing. 

_ Water treatment plants as customers are "risk-averse" toward new technolo¬ 
gies. 

_ Remediation / waste management are low growth sectors with low margins. 

_ Management teams in ET business plans generally lack experience, espe¬ 
cially in marketing and manufacturing expertise, and for managing growth 
of new technology ventures. 

_ Investment exit strategy for ET is more difficult than energy-related 

Cleantech segments. 

Regulatory & Policy Factors / Challenges 

_ A lack of new environmental legislation (e.g„ Clean Air Act, RCRA) limits 

upside growth. 

_ EPA's budget has been declining since 2004, reducing resources for enforce¬ 
ment, which in turn has muted market growth for ET. 

_ Big equipment makers and engineering firms hamper the pace of ET adop¬ 
tion by favoring traditional, proven technologies over innovative ET. 

_ Climate change legislation still has not been enacted, so it is not a driver yet. 

_ Climate change legislation, if it occurs in the next five years, will provide 

more stimulus for renewable energy than ET (list above), (i.e.. Of dollars 
invested in Cleantech, more will go into energy than into ET.) 

_ Lack of familiarity with applications of ET technologies by federal / state reg¬ 
ulators hinders use. 

Other:_ 


■ B. Future Investment Outlook (next 3 years) 

1. Which of the following ET subsectors do you expect to invest in over the next 
3 years? 

Rate each one for "High" (5), "Medium" (3) or "Low" (1) level of investment compared to the 
total amount of investment your firm expects to be making over the next 3 years. 

General ET segments (rate based on scale aboveT : 

_ Monitoring and assessment technologies 

_ Pollution prevention and control 

_ Remediation and restoration technologies 

_ Renewable or clean energy technologies and systems 































C leantech ET subsegmen ts, e xcluding energy (rate based on scale aboveV 

— Agriculture (i.e., natural pesticides, land management, and aquaculture) 

— Air pollution control (cleanup, emissions control, monitoring - Sox, NOx, Hg, 
PM) 

— Low carbon projects, carbon offsets, monitoring technology for C02, GHGs 

— Manufacturing and industrial (advanced packaging, smart or "green" pro¬ 
duction) 

— Materials and industrial efficiency (i.e., "nanotech", biomaterials, chemicals) 
_ Recycling and hazardous or solid waste treatment 

— Water & wastewater (water treatment, conservation, and wastewater treat¬ 
ment). 

2. Which of the following might best promote market use or adoption of ET? 

(Rate all on 1 to 5 scale, where 5 = "best", 3 = "some impact" and 1 = "least impact") 


Voluntary educational campaigns for wider use of technologies (e.g„ EPA, 
state outreach) 

Corporate environmental commitments (voluntary or share-holder driven) 
Expedited permitting, verification programs, or ISO Standards, for innovative 
ETs 

Federal mandates, e.g„ appliance standards, fuel requirements, water treat¬ 
ment regulations 

Government purchasing programs for innovative "green" technologies 
Federal agency funded R&D/Demos, followed by technology transfer pro¬ 
grams with industry 

Government grants to ET technology firms for innovative devices (SBIR, R&D 
contracts) 

Revolving loans, credit support (lower interest rates) for systems that employ 
ETs 

Subsidies for investment, e.g., Investment Tax Credits, accelerated deprecia¬ 
tion, R&D tax credits 

Federal subsidies for innovative technology performance, e.g., production 
tax credits 

Taxes on traditional usage, e.g., taxes on fossil fuels or GHGs, increased 
water rates 

International collaboration programs in ET 


C. EPA Activities 


Which of the following EPA programs, policies or actions provide value added 

information for ET investment decisions? 

(Rate all on 1 to 5 scale, where 5 = "best", 3 = "some impact" and 1 = "least impact" 

_ Programs (such as the Diesel Retrofit Technology Verification Program) that 

approve specific technologies for a given set of emission reduction credits? 

_ Grant or other financial incentive programs that link monetary support 

directly to a class of technologies? 

_ Reports of the performance of ET such as results of a verification or demon¬ 
stration in the field in real world situations? 

_ Technologies that have been through Phase I and II of the SBIR program 

where the technology has been peer reviewed? 

__ EPA approved analytical methods? 

_ Training and technical support of state regulatory personnel, consulting 

groups or others on what technologies are available and their efficacy? 

































Correspondence from EPA Program Offices to EPA Regions supporting the 

use of particular classes of technologies? 

Rules, regulations, technical guidance documents that specify the use of 

selected technologies? 

Technologies where EPA researchers have developed or helped co-develop 

the technology? 

Others? Please specify. 

D. Open-Ended Questions 

1. What are the most important metrics used by your firm in evaluating envi¬ 
ronmental technology (ET) investments? 

2. What is driving ET investment - EPA activities or Private Sector activities - 
or both? 

3. Do you think ETs have a more difficult entry and/or exit investment strate¬ 
gy than other clean technologies? If so, what can be done to make it 
easier? 

4. Are there characteristics of ET technologies and markets that need to 
change to attract venture investment? 

5. Which ET segments (e.g., climate change, water technologies, etc.) have 
the greatest potential to generate investments in the next few years? 

6. Are there "crossover" opportunities for certain technologies to support 
both ET and energy technologies? 

7. What can EPA do to reduce the ET investment risks? 

8. What EPA activities present significant barriers to ET investment? 

9. Are there some successful technology development and commercializa¬ 
tion programs that EPA learn from? If so, what are the programs? 

to. How can EPA continue a dialogue with the investment community in the 
future? 


O 









Cleantech Definition 


Cleantech Segment 


Cleantech Definition 


Agriculture 

Example Technologies 

Bio-based materials; farm efficiency technologies; 
micro-irrigation systems; bioremediation; non-toxic 
cleaners and natural pesticides. Does not include 
organic health food or natural health products. 

Air & Environment 

Air purification products and air filtration systems, ener¬ 
gy efficient HVAC; universal gas detectors; multi-pollu¬ 
tant controls; fuel additives to increase efficiency and 
reduce toxic emissions. 

Materials 

Biodegradable materials derived from seed proteins; 
micro-fluidics technology for conducting biochemical 
reactions; nanomaterials; composite materials; thermal 
regulating fibers and fabrics; environmentally friendly 
solvents; nanotechnology components for electronics, 
sensor applications, and energy storage; elec- 
trochromic glass; thermoelectric materials. 

Energy 

Energy Generation 

Distributed and renewable energy generation and 
conversion, including wind, solar/photovoltaic, 
hydro/marine, biofuels, fuel cells, gasification technolo¬ 
gies for biomass, and flywheel power systems. 

Energy Infrastructure 

Wireless networks to utilities for advanced metering, 
power quality monitoring and outage management; 
integrated electronic systems for the management of 
distributed power; demand response and energy man¬ 
agement software. 

Energy Storage 

Batteries, e.g., thin film and rechargeable; power quali¬ 
ty regulation; flywheels; electro-textiles. 

Energy Efficiency 

Energy management systems; systems that improve 
output of power generating plants; intelligent metering; 
solid state micro-refrigeration; control technology for 
HVAC systems; automated energy conservation net¬ 
works. 

Recycling & 

Waste 

Recycling technologies; waste treatment; internet mar¬ 
ketplace for materials; hazardous waste remediation; 
bio-mimetic technology for advance metals separation 
and extraction. 

Manufacturing/ 

Industrial 

Advanced packaging; natural chemistry; sensors; smart 
construction materials; business process and data flow 
mapping tools; precision manufacturing instruments & 
fault detectors; chemical management services. 

Transportation 

Hybrid vehicle technology; lighter materials for cars; 
smart logistics software; car-sharing; temperature pres¬ 
sure sensors to improve transportation fuel efficiency; 
telecommuting. 

Water & 

Wastewater 

Water recycling and ultra-filtration systems (e.g., UV 
membrane and ion exchange systems); sensors and 
automation systems; water utility sub-metering technol¬ 
ogy desalination equipment. 


Source: Jones, et al„ 2007 and Parker, et al., 2007 





















Appendix E: Open-Ended Questions and Sub-Questions 


Venture Capital Study - Interview Instrument 

NOTE: These subquestions are for the interviewers’ use only. 

These will not be sent to the interviewees prior to the interview. 

1. What is your firm's approach to investments in this field? What are the 
most important metrics used by your firm in evaluating environmental 
technology (ET) investments? 

■ Are there specific issues for ETs that influence investment 
strategies? 

■ Are there transition issues for ET companies as they advance in 
each round? 

2. What is driving ET investment—EPA activities, private sector activities, or 
both? 

■ EPA activities such as compliance/enforcement, voluntary pro¬ 
grams, industry partnerships, technology assessment/verification 
programs? 

■ Private sector activities such as global competitiveness, share¬ 
holder pressures, institutional investors, sustainability, socially 
responsible investing? 

3. Do you think ETs have a more difficult entry and/or exit investment strate¬ 
gy than other clean technologies? If so, what can be done to make it 
easier? 

■ How much "draw" from institutional investors are you seeing for 
investment in ET? 

4. Are there characteristics of ET technologies and markets that need to 
change to attract venture investment? 

■ One frequently mentioned concern for cleantech, especially ETs, 
is the slow rate of market utilization and adoption. Innovative 
cleantech companies frequently try to sell their products 
upstream against competing, deeply entrenched traditional 
approaches. 

■ Is there a fundamental deficiency inherent to ET that limits the like¬ 
lihood of profitability and thus investment in this sector? 

■ What are the elements of ET companies, technologies, and mar¬ 
kets that account for less venture investing in certain years com¬ 
pared to investments in other categories? 

■ Is the level of technology advancement in ETs sufficient to attract 
venture investment? 

5. Which ET segments (e.g., climate change, water technologies, etc.) have 
the greatest potential to generate investments in the next few years? 

■ You rated the following categories "high"_. 

Why ? 

■ What technologies should be invested in to mitigate and adapt 
to rapid climate change? 

■ What can EPA do to work with the investment community in get¬ 
ting climate change-related ETs to market? 

■ Have you seen increases in venture capital investments into com¬ 
panies in the areas of water treatment, filtration, and purification; 
conservation and efficiency; and wastewater treatment and 
reuse? If so, what do you believe has driven this sustained and 
increased investment? 







■ Are you aware of technology breakthroughs in this sector or other 
ET sectors that merit sustained venture capital interest? 

■ Why did you rate the following areas "low": 
_? 


6. Are there "crossover" opportunities for certain technologies to support 
both ET and energy technologies? 

■ For example, combustion techniques that reduce loading of air 
pollutants and also improve fuel use efficiency. 

■ Is there a role to play for EPA to integrate market opportunities to 
achieve multiple objectives? 

■ Are there clean energy and environmental investment differ¬ 
ences? 

7. What can EPA do to reduce the ET investment risks? 

■ Leadership in science and advocacy for technology? 

■ Research and development? 

■ Verification protocols? 

■ Use of EPA's grant or loan (i.e.. State Revolving Fund) funds to pro¬ 
mote/pay for technologies? 

■ Compliance assistance and technology promotion? 

8. What EPA activities present significant barriers to ET investment? 

■ Regulations specifying control technologies (Effluent Guidelines, 
Best Available Control Technology, New Source Performance 
Standards, etc.)? 

■ Methods—sampling, analysis, and instrumentation? 

■ Compliance assurance and enforcement? 

9. Are there successful federal and/or private sector technology develop¬ 
ment and commercialization programs that EPA can learn from? Is so, 
what are the programs? 

■ Department of Energy? 

■ Department of Defense (e.g„ DARPA)? 

■ National Laboratories? 

■ University-based technology promotion offices? 

■ Small Business Administration? 

■ State Departments of Commerce? 

■ Consortia and/or public-private partnerships such as SEMATECH 
(SEmiconductor MAnufacturing TECHnology) and CalStart? 

■ Do you have any examples to suggest or experiences to share? 

10. How can EPA continue a dialogue with the investment community in the 
future? 

■ Having this opportunity to interview you and other senior members 
of the investment community is very helpful to us. We would like 
to devise a way that we could continue getting this type of 
advice on a regular basis. 

■ Would creating an advisory panel consisting of senior members of 
the investment community work? 

■ If so, how should the membership be determined? 

■ What are the best ways to have ongoing working relationships 
and partnerships with individuals, associations, and others? 

■ Are there conferences and/or seminars where information could 
be shared between government and private sector representa¬ 
tives? 


0 









Appendix F: Summary of Pre-Interview Question Responses 


Pre-Instrument Ratings (9) 

The nine venture capitalists interviewed rated a series of niches and factors in 
the Pre-Interview Instrument. The nine interviewees were: 

Rob Day, Principal-@Ventures 

John DeVillars, Founder and Partner-BlueWave Strategies 

Hank Habicht, Managing Partner-SAIL Venture Partners 

Winston Hickox, Partner-California Strategies 

Kef Kasdin, General Partner-Battelle Ventures 

Eric McAfee, Managing Director-Cagan McAfee Capital Partners 

Chuck McDermott, General Partner-RockPort Capital Partners 

William Reilly, Founding Partner-Aqua International Partners/ 

Texas Pacific Group 

Rosemary Ripley, Member-NGEN Partners 
A summary of the interviewees' responses follows: 

■ Current and Future Investment Trends for Environmental Technology 
Segments— Clean energy was rated highest for current and future invest¬ 
ment. Several high profile clean energy deals went public in 2006 and 
2007, creating broader venture capital interest. EPA actions related to air 
emissions and water resource impacts have a direct bearing on clean 
energy options. Within environmental technology segments, "low car¬ 
bon" projects drew the highest levels of interest given heightened 
prospects of legislation, while back-end remediation was seen as low 
growth and rated lowest. 

■ Observations About Factors that Affect Investment in Environmental 
Technology— There was wide agreement that EPA's research budget was 
not adequate relative to the challenges and opportunities at hand. There 
was some sense that improved industry and government laboratory inter¬ 
action could lead to more technologies finding their way to the market¬ 
place. Most interviewees view engineering firms and big equipment mak¬ 
ers as more risk-averse to new technologies, perhaps because they are 
more invested in the current approaches, and there is little incentive to 
risk trying new approaches absent some elevated enforcement or new 
regulations. Likewise, POTWs (sewage treatment plants) were seen as risk- 
averse customers with little to gain from going beyond current regula¬ 
tions. Although climate change legislation could be an interesting driver, 
the lack of consensus on specific measures is causing uncertainty. 
Nevertheless, it is a heightened area for investment interest. 

■ Viewpoints on Activities for Promoting Environmental Technology More 
Broadly— Many investors noted that although investment deals could not 
be totally dependent on regulations, new mandates help form markets. 
Government grants and other subsidies also could help new technologies 
cross the proverbial "valley of death" from laboratory to commercial use. 
The interviewees saw taxes on conventional fuels and water as encourag¬ 
ing adoption of environmental technology because they would increase 






the cost of conventional use patterns, and offer incentive for innovative 
approaches. International collaboration rated low universally, as most of 
the interviewees were focused domestically. 

Reactions to EPA Activities Related to Environmental Technology— 

Mirroring the notion that mandates can help create markets or demand 
for environmental technology, technical guidance specifying use Of envi¬ 
ronmental technology was rated highest among the EPA activities. Grants 
(or perhaps revolving funds because of EPA budget constraints) also 
could be useful, perhaps for feasibility analyses. Some of the ratings of 
EPA activities were impacted by limited awareness of specific EPA pro¬ 
grams and activities by some interviewees. 

The responses were completed in February. The ratings and observations are 
presented below. 

Ratings for Interviews 

A. Current Investment Practices 


Al. Overall “Attractiveness” of ET Market Segments 



Avg (9) 

General ET segments 

Monitoring and assessment technologies 

3.3 

Pollution prevention and control 

3.3 

Remediation and restoration technologies 

2.8 

Renewable or clean energy technologies and systems 

4.9 

Cleantech ET subsegments, excluding energy 

Agriculture (i.e„ natural pesticides, land management, aquaculture) 

3.3 

Air pollution control (emissions control, monitoring) 

3.4 

Low carbon projects, carbon offsets, monitoring for GHGs 

4.1 

Manufacturing and industrial (packaging, "green" mfg.) 

3.8 

Materials & efficiency ("nanotech", biomaterials, chem) 

3.7 

Recycling and hazardous or solid waste treatment 

2.8 

Water & wastewater (treatment, conservation, recycling). 

3.8 

Overall average 

3.6 


A1 Observations on Current Investment 

Overall, renewable energy related deals have attracted the most invest¬ 
ment. Low carbon projects were rated highest among the ET segments, perhaps 
because of the elevated interest in the "climate change" issues as a driver for 
new market niches and for growth of expenditures to curtail carbon emissions. 
Recycling and hazardous waste rated lowest as a back-end business that saw a 
lot of bankruptcies in the 1990s.Water treatment rated just higher than average, 
could attract more capital with better growth prospects. 
























A2. Factors Affecting Attractiveness of ET Segments 

1 = strongly Disagree; 2=disagree; 3=maybe; 4=agree; 5=strongly Agree 



Avg (9) 

Technology Factors / Challenges 

Venture capital investment in ET (vs. "clean energy") lags. 

3.6 

EPA R&D budget not at level that moves ET to market. 

4.4 

Industry funding of R&D in ET is inadequate, limiting innovation. 

3.4 

Industry - Gov't / Lab interaction on ET R&D must be improved 

4.3 

Rigor of IP protection in ET lags other technology areas. 

2.8 

Linkage between industry and permitting is weak. 

4.0 

Verification results (EPA ETV) not valuable enough 

4.0 

Engineering firms lack incentives to promote ET technology. 

4.2 

ET lacks a level of breakthroughs to merit venture investment. 

2.8 


Market Factors / Challenges 

Market growth for ET is less attractive than other sectors. 

3.2 

Market growth for ET is less attractive vs. renewable energy. 

3.9 

Water market spending not growing fast enough for venture financing. 

4.1 

Water treatment plants are "risk-averse" customers on ET. 

4.9 

Remediation / waste mgmt suffer low growth, low margins. 

4.0 

Mgmt teams in ET lack experience for managing growth. 

3.1 

Investment exit strategy for ET is more difficult than Cleantech energy. 

3.9 


Regulatory & Policy Factors / Challenges 

Lack of new environmental legislation limits upside growth. 


EPA's budget (down since 2004) reduces enforcement, growth for ET. 

3.4 

Equipment makers, engineering firms hamper ET adoption. 

3.9 

A climate change bill not enacted, so it is not a driver yet. 

4.3 

Climate change legislation (by 2012) will provide more stimulus for 
renewable energy than ET 

3.6 

Lack of familiarity with ET by regulators hinders use. 

3.6 

Overall average (for A2) 

3.8 


A2 Observations on Factor Ratings 

There was wide agreement that EPA's R&D budget was not adequate rela¬ 
tive to the challenges and opportunities at hand. Perhaps related to R&D fund¬ 
ing is a sense that Industry and government lab interaction can be improved so 
that more of the R&D funding actually finds its way into the marketplace, a key 
issue in "bridging the gaps" to investors and industry. 

Many interviews see engineering firms and big equipment makers as more 
risk-averse to new technologies, perhaps because they are more invested in the 
current approaches, and there is little incentive to risk trying new approaches 
absent some elevated enforcement or new regulations. Likewise, POTWs 
(sewage treatment plants) were seen as risk-averse. 


O 







































Although climate change is an interesting driver, the lack of consensus on 
legislation is causing uncertainty. Still, it is a heightened area for investment inter¬ 
est. Regulators also need to improve their familiarity with innovative ET. 

B. Future Investment Outlook (Next 3 years) 

B1. Which ET subsectors do you expect to invest in (next 3 years)? 

Rate each one for "High" (5), “Medium" (3) or “Low" (1) level of investment compared to total 
amount of investment your firm expects over the next 3 years. 


General ET Segments 

Bl. 

Future 

Average 

Al. 

Current 

Average 

Monitoring and assessment technologies 

3.4 

3.3 

Pollution prevention and control 

2.7 

3.3 

Remediation and restoration technologies 

1.9 

2.8 

Renewable or clean energy technologies and systems 

5.0 

4.9 

Cleantech ET subsegments, excluding energy: 

Agriculture (i.e„ natural pesticides, land management, 
aquaculture) 

3.0 

3.3 

Air pollution control (emissions control, monitoring) 

3.0 

3.4 

Low carbon projects, carbon offsets, monitoring for GHGs 

4.3 

4.1 

Manufacturing and industrial (packaging, "green" mfg.) 

3.0 

3.8 

Materials & efficiency ("nanotech", biomaterials, chem) 

3.6 

3.7 

Recycling and hazardous or solid waste treatment 

2.0 

2.8 

Water & wastewater (treatment, conservation, recycling). 

3.2 

3.8 

Overall average (for Bl) 

3.2 

3.6 


B1 Observations on Future Investment 

Energy related deals will continue to attract more investment, while remedia¬ 
tion has become less attractive as a market that has plateaued, and one where 
technology is not seen to be as applicable to a high growth niche. Low carbon 
projects were rated high across the board based on broader market activity. 
Manufacturing or industrial packaging fell in attractiveness going forward. 


B2. Which might best promote market use or adoption of ET? 

(Rate all on 1 to 5 scale, where 5 = "best", 3 = "some impact" and 1 = "least impact") 



Avg (9) 

Voluntary educational campaigns for use of ET 
(e.g., EPA, state outreach) 

2.7 

Corporate environmental commitments 
(voluntary or share-holder driven) 

3.7 

Expedited permitting, verification programs, or ISO Standards, for ET 

4.1 

Federal mandates: appliance standards, fuel regulations, water 
regulations 

4.7 

Government purchasing programs for innovative "green" technologies 

3.9 

Federal aaoncy funded R&D/Demos, technology transfer with industry 

4.2 

Government arants to ET firms for innovative devices (SBIR, R&D) 

4.4 


o 


































Avg (9) 

Revolving loans, credit support (lower interest rates) for systems with ET 

3.9 

Subsidies for investment, e.g.. Investment Tax Credits, depreciation 

4.6 

Federal subsidies for technology performance, e.g., production 
tax credits 

4.7 

Taxes on traditional usage, e.g., taxes on fossil fuels or GHGs, water use 

4.9 

International collaboration programs in ET 

2.1 

Overall average (for B2) 

4.0 


B2 Observations on Promotion of Environmental Technology 

Many investors noted that while deals could not be totally dependent on 
regulations, new mandates help form markets. Government grants and other 
subsidies could also help new technologies cross the proverbial "valley of death" 
from lab to commercial use. All saw taxes on conventional fuels and water as 
encouraging adoption of ET. International collaboration rated low universally, as 
most were focused domestically. 

■ C. EPA Activities 

Which of the following EPA programs, policies, or actions provide value 
added information for ET investment decisions? 

(Rate all on 1 to 5 scale, where 5 = "best", 3 = "some impact" and 1 = "least impact") 



Avg (9) 

Programs approving specific technologies for emission reductions 

3.9 

Grant or other incentives to directly fund a class of technologies 

3.9 

Reports of ET field performance (verification or demonstration) 

3.4 

Technology peer review (after Phase 1 and II of SBIR program) 

3.6 

EPA approved analytical methods 

2.9 

Training and technical support of state regulatory personnel, consultants 

3.3 

Correspondence from EPA Program Offices to EPA Regions for ET 

3.0 

Rules, regulations, technical guidance specifying use of selected ET 

4.0 

Info on technologies from EPA researchers 

2.8 

Overall average (for C) 

3.4 


C Observations on EPA Activities 

Mirroring the notion that mandates can help create markets or demand for 
ET, technical guidance specifying use of ET was rated highest among EPA activi¬ 
ties. Grants could also be useful, perhaps for feasibility analysis. Some of the rat¬ 
ings of EPA activities were muted by incomplete awareness of EPA programs and 
activities by some interviewees. 


O 



























Appendix G: Examples of Successful Investments from the 

Venture Capital Community 


The venture capitalists interviewed provided a number of examples of suc¬ 
cessful investments in environmental technology. This appendix contains a selec¬ 
tion of these examples to provide some idea of the range and type of invest¬ 
ments that have been and can be made by the venture capital community. 


Advanced Electron Beam 

www.aeb.com 

"Funding New Technology That Holds Promise for a Cleaner Environment" 

RockPort Capital Partners 

Advanced Electron Beam (AEB), a Wilmington, Massachusetts company, has 
developed a breakthrough electron beam technology—the AEB Emitter—that is 
10 times less expensive and 100 times more compact in size than conventional 
electron beam units. While electron beams have historically been used in indus¬ 
trial applications to replace chemical and thermal processes, adoption has been 
limited because of high equipment and operating costs, complex implementa¬ 
tion, and the huge size of conventional electron beam technologies. By con¬ 
trast, the AEB Emitter makes it possible to integrate this clean energy source into 
a wide array of applications that was never before technically or economically 
feasible. 

The small size of AEB Emitters allows electron beams to be easily integrated 
"in line" into existing manufacturing and production equipment, bringing the 
beam to the production line for maximum process efficiency. Available in 10-inch 
and 16-inch models, AEB Emitters can be aligned in multiples to produce a beam 
of any desired width and are small enough to be directed at any angle. 
Additional geometries to increase coverage area, electron dose and process 
throughput also are possible. AEB Emitters have an operating voltage of 80-150 
kV and weigh less than 30 pounds. Moreover, the approach requires no active 
vacuum pumping equipment, offers a compact, solid-state power supply, and 
requires no in-plant engineering or maintenance expertise. 

AEB Emitters offer the opportunity for a variety of manufacturers to transform 
their production processes. Many companies in large industries are very interest¬ 
ed in reducing manufacturing costs, saving energy, and eliminating pollution and 
those are the benefits offered by this new technology. AEB Emitters can address 
a range of applications across the sterilization, pollution abatement, and curing 
and polymer treatment sectors. Specific AEB Emitter applications include: the 
destruction of airborne viruses and bacteria; the extension of shelf life of foods; 
generation of hydrogen for fuel-cell vehicles; the modification of recycled tires 
into high-quality engineered plastics; and the removal of hazardous gases, such 
as sulfur and nitrous oxides (SO x /NO x ), from fossil-fuel burning power plants. 

In March 2007, Advanced Electron Beam announced it has received $17.5 
million in a Series B funding round led by RockPort Capital Partners, with participa¬ 
tion from existing investors Atlas Venture and General Catalyst Partners. The fund¬ 
ing will be used to accelerate AEB's efforts to commercialize its AEB Emitters as 


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one of the world's most efficient clean, and cost-effective forms of industrial 
energy, A RockPort Capital General Partner serves on the Board of Directors of 
Advanced Electron Beam. 


AE Biofuels 

www. aebiofuels. com 

"New Ethanol Production Technology Responds to Energy and 
Environmentol Legislation" 

Cagan McAfee Capital Partners 

AE Biofuels, Inc., Cupertino, California, is an advanced energy company that 
has constructed and is developing next-generation ethanol and biodiesel pro¬ 
duction worldwide. AE Biofuels is seeking to become the first independent verti¬ 
cally integrated biofuels company in the world. The company is developing bio¬ 
fuels production from both nonfood and traditional materials. AE Biofuels has a 
new cellulosic ethanol plant in Montana, three biodiesel plants operating or 
planned in India, and six U.S. ethanol plants—five plants in Illinois and one plant in 
Nebraska. 

On December 19, 2007, President Bush signed the Energy Independence 
and Security Act of 2007 (EISA, Public Law 110-140). This new law covers a wide 
range of energy topics with extensive attention to biofuels, including ethanol and 
biodiesel. Key biofuels-related provisions include: a major expansion of the 
renewable fuel standard (RFS) established in the Energy Policy Act of 2005 
(EPAct) expansion and/or modification of tax credits for alternative fuel refueling 
infrastructure, and for ethanol and renewable diesel fuels; grants and loan guar¬ 
antees for biofuels research, development, deployment, and production; studies 
of the potential for ethanol pipeline transportation, expanded biofuel use, market 
and environmental impacts of increased biofuel use, and the effects of biodiesel 
on engines; and reauthorization of biofuels research and development at the U.S. 
Department of Energy (DOE) and the U.S. Department of Agriculture (USDA). 

Title II of EISA requires a dramatic expansion of the RFS under EPAct 2005. 
Instead of the 5.4 billion gallons required in 2008 by the EPAct, EISA requires 9,0 
billion gallons. By 2022, EISA will require 36 billion gallons of renewable fuel in 
motor fuels annually, compared to an estimated 8.6 billion gallons under the 
EPAct. Of that, 21 billion gallons must be "advanced biofuel," defined as biofuel 
produced from feedstocks other than corn starch and having 50 percent lower 
lifecycle emissions than petroleum fuels. Advanced Biofuel has three different 
subcategories: cellulosic biofuel, biomass-based diesel, and other. 

On February 7, 2008, EPA published new RFS regulations to comply with the 
EISA 2008 provision for 9 billion gallons of ethanol use. The new RFS is 7.76 percent 
ethanol in gasoline for 2008. Section 211 of the Clean Air Act (CAA), as amend¬ 
ed by EISA, requires EPA to annually determine an RFS that is applicable to refin¬ 
ers, importers, and certain blenders of gasoline, and publish the standard in the 
Federal Register. This standard is calculated as a percentage, by dividing the 
amount of renewable fuel that the Act requires to be blended into gasoline for a 
given year by the amount of gasoline expected to be used during that year. 

EPA originally set the RFS for 2008 at 4.66 percent based on the RFS requirement 
of 5.4 billion gallons in 2008 in the EPAct of 2005. 


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In February 2008, AE Biofuels, announced the construction of an integrated 
cellulose and starch ethanol commercial demonstration facility in Butte, 

Montana. The plant will use the company's proven patent-pending Ambient 
Temperature Starch Hydrolysis (ATSH) enzyme technology to optimize process 
conditions for multiple feedstocks. Nonfood ethanol feedstocks used by the facili¬ 
ty are expected to include switch grass, grass seed straw, small grain straw, and 
corn stalks alone and in combination with a variety of traditional starch and 
sugar sources. The 9,000 square-foot pilot plant facility is expected to be fully 
operational in the second calendar quarter of 2008. 

The AE Biofuels technology significantly reduces the consumption of energy 
and water in the production of ethanol, and allows the use of a combination of 
nonfood and traditional feedstock inputs. Applications of the ATSH enzyme tech¬ 
nology also may include licensing or joint ventures with sugar cane ethanol 
plants. 

AE Biofuels is supported by Cagan McAfee Capital Partners, a Silicon Valley- 
based venture capital organization. Eric McAfee, Managing Director, Cagan 
McAfee Capital Partners, also is the Chairman and Chief Executive Officer of AE 
Biofuels, Inc. 

Aldis, Inc. and Planar Energy Devices 

www.aldiscorp.com and www.planarenergy.com 

"Technology 'Spinouts' from Government Laboratories" 

Battelle Ventures 

Battelle Ventures, LP, and its affiliate fund. Innovation Valley Partners (IVP), 
have committed nearly $8 million in start-up financing to two energy-related 
companies, Aldis, Inc., and Planar Energy Devices, Inc., which are direct spinouts 
of the U.S. Department of Energy's national laboratories managed by Battelle 
Ventures' sole limited partner, Battelle Memorial Institute (Battelle). 

Aldis, a traffic management technology company focused on energy effi¬ 
ciency, has a joint development agreement with Oak Ridge National Laboratory 
(ORNL), and Planar Energy Devices (Planar), a power-storage company develop¬ 
ing thin-film batteries, is a spinout of DOE's National Renewable Energy 
Laboratory (NREL), as well as a licensee of both NREL and ORNL technology. 

Aldis and Planar are examples of how Battelle Ventures has acted as 
"founder capitalists," building technology companies from the ground up. With 
Battelle as a limited partner, Battelle Ventures cannot only deploy a unique set of 
company-building capabilities, but it also can leverage its position as a bridge 
between early-stage businesses or technology entrepreneurs and the Battelle 
network to add value to Battelle Ventures' portfolio companies. 

Battelle Ventures investments in Aldis and Planar unfolded differently. For 
Aldis, assurances of the management team capability came before the technol¬ 
ogy. The idea for advanced traffic management came from the Aldis 
cofounders, who Battelle Ventures took to visit ORNL, where some related proj¬ 
ects were in development. 


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Battelle Ventures became aware of the differentiated power-storage tech¬ 
nology created at NREL, which became the basis for Planar. Battelle Ventures 
funded early prototype development of the technology and recruited Planar's 
Chief Executive Officer for the spinout. Planar then was introduced to comple¬ 
mentary work going on at ORNL in the thin-film battery area and, as a result, 
became a licensee of ORNL technology as well. 

M2E Power 

www. m2e power, com 

"Utilizing CRADAs to Demonstrate and Commercialize Innovative 
Technologies" 

©Ventures 

M2E Power, Inc., a Boise, Idaho company, has developed a micro-generator 
that converts everyday human and vehicle motion into enough energy to power 
mobile electronic devices. The company expects its technology—an advance 
on the technology found in devices like self-winding watches and battery-free 
flashlights—will eventually power cell phones, digital cameras, and portable 
entertainment players. For now, however, the company is focusing on powering 
mobile devices on the battlefield. 

The patent-pending M2E™ (Motion to Energy) technology originated with 
Department of Energy-funded research at the Idaho National Laboratory (INL). 
Inventor Eric Yarger and his team at the INL sought to ease the military's battery 
dependence for mobile power and offer soldiers a way to generate power as 
they move around. It leverages the well-proven Faraday Principle (energy pro¬ 
duced via motion of a magnet through a wire coil), but with changes in the 
magnetic architecture that have broad applicability to many sizes of motor gen¬ 
erators. 

In November 16, 2007, @Ventures, the clean technology venture capital busi¬ 
ness of CMGI®, Inc., announced that it made a $2.0 million investment in M2E 
Power, Inc. ©Ventures participated in the company's $8 million Series A financing 
round, along with OVP Venture Partners, Highway 12 Ventures and existing 
investors. 

M2E Power will use the funds to speed commercialization of its M2E™ tech¬ 
nology, which has the potential to fundamentally transform the way military and 
consumer mobile devices are powered. M2E also may provide significant eco¬ 
nomic benefits for larger-scale generator applications such as wind and ocean 
wave power. 

M2E also is an eco-friendly, cleantech solution that can significantly reduce 
carbon emissions in larger applications. Depending on usage, it may not need to 
draw from power grids to recharge itself. It eliminates up to 30 percent of the 
highly toxic heavy metal contained in typical batteries and—by doubling battery 
life—cuts in half the number of batteries discarded in landfills. 


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ORYXE Energy International and WaterHealth International 

www.oryxe-energy.com and www.waterhealth.com 

"Technology Verification Validates Innovative Environmental Technology 
Claims" 

SAIL Venture Partners 

ORYXE Energy and WaterHealth International (WHI), both in Irvine, California, 
have developed patented environmental technologies that are addressing 
unique environmental problems. ORYXE Energy has developed a breakthrough 
additive, ORYXE™ RFT, to improve efficiency and reduce harmful emissions in 
residual oil-fired boilers and process heaters. WHI developed a low cost, ultravio¬ 
let water disinfection device, the UV Waterworks™ (UVW), which was invented to 
address the needs of underserved communities around the world. Both patent¬ 
ed technologies have been subjected to air and water pollution testing proce¬ 
dures developed by EPA to validate their pollutant reductions claims. 

Testing has proven that ORYXE RFT provides significant reductions in particu¬ 
late matter emissions while keeping NO x neutral and improving furnace heat 
transfer. Residual oil-fired plants experience reduced black smoke emissions from 
their exhaust stacks and improved overall efficiency with the use of ORYXE RFT. 
The efficiency improvement often offsets the cost of the additive, thus providing 
users with an emission reduction program that requires no large capital expense 
and little to no operational expense. 

Dr. Ashok Gadgil, Vice President of Scientific Affairs for WHI, developed UVW 
at the DOE Lawrence Berkeley National Laboratory. Through a multi-stage filtra¬ 
tion process coupled with a proprietary ultraviolet disinfection technology, con¬ 
taminated water is converted into clean, potable water that exceeds the World 
Health Organization's standards for potable water. The UVW-based system effec¬ 
tively purifies and disinfects water contaminated with a broad range of 
pathogens, including polio and roto viruses, oocysts, such as Cryptosporidium 
and Giardia. Low maintenance requirements, high efficiency, and high through¬ 
put make UVW systems capable of delivering affordable, high-quality drinking 
water even to remote and rural markets that have previously been under served. 

ORYXE Energy's new technology already has been proven to reduce emis¬ 
sions in diesel fuel. The technology was used to develop an alternative diesel for¬ 
mulation, approved by the Texas Commission on Environmental Quality, to meet 
the new Low Emission Diesel standards in Texas. The immediate success of this 
product, called ORYXE LED, also proves ORYXE Energy's ability to meet its promise 
to supply a revolutionary new additive to the market. 


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Pacific Ethanol 

www.pacificethanol.net 

"Time to Market for Clean Technologies is Essential" 

Cagan McAfee Capital Partners 

Pacific Ethanol Inc., Fresno, California, is the largest Western United States 
marketer and producer of ethanol. The company was founded in 2003, and by 
2006, it was worth $1.8 billion, and publicly traded. Pacific Ethanol has opera¬ 
tional ethanol plants in Madera, California, and Boardman, Oregon, and has two 
additional plants under construction in Burley, Idaho, and in Stockton, California. 
Pacific Ethanol also owns a 42 percent interest in Front Range Energy, LLC, which 
owns an ethanol plant in Windsor, Colorado. From these facilities. Pacific 
Ethanol's goal is to achieve 220 million gallons per year of ethanol production 
capacity in 2008, and to increase total production capacity to 420 million gallons 
per year in 2010. 

In February 2006, Fortune Magazine called Pacific Ethanol the only publicly 
traded pure-play ethanol maker and commended the company for its ability to 
raise a private equity total of $111 million, including $84 million from Bill Gates. 
Based on DOE estimates. Fortune predicted that, by 2030, ethanol could replace 
up to 30 percent of the projected gasoline usage at that time. 

On December 19, 2007, President Bush signed the Energy Independence and 
Security Act of 2007 (EISA, Public Law 110-140). This new law covers a wide range 
of energy topics with extensive attention to biofuels, including ethanol and 
biodiesel. By 2022, EISA will require 36 billion gallons of renewable fuel in motor 
fuels annually, compared to an estimated 8.6 billion gallons under the former 
Energy Policy Act. Of this 36 billion gallon requirement, 21 billion gallons must be 
"advanced biofuel," defined as biofuel produced from feedstocks other than 
corn starch and having 50 percent lower lifecycle emissions than petroleum fuels. 

In January 28, 2008, the U.S. Department of Energy announced that Pacific 
Ethanol would receive a matching grant award totaling $24.32 million to build 
the first cellulosic ethanol demonstration plant in the Northwest United States. The 
pilot plant is designed to produce 2.7 million gallons of ethanol annually. The 
plant will employ a technology to produce ethanol from wheat straw, wood 
chips, and corn stover and will be co-located at the site of Pacific Ethanol's exist¬ 
ing corn-based ethanol facility in Boardman, Oregon. Pacific Ethanol's partners 
in winning this competitive process were, BioGasol ApS and the Joint BioEnergy 
Institute (a consortium of academic institutions and DOE laboratories including 
the Lawrence Berkeley National Laboratory and Sandia National Laboratory). 
BioGasol ApS has developed the proprietary technology and the Joint BioEnergy 
Institute will be providing support and specific research and development on 
enzyme technology. 

The two principal founders of Pacific Ethanol were Eric McAfee, Cagan 
McAfee Capital Partners, and Bill Jones, former Secretary for the California 
Environmental Protection Agency. 


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Sensicore 

www. sensicore. com 

"ETV Evaluates the Sensicore 'Lab-on-Chip' Water Testing Technology" 

NGEN Partners 

Sensicore, an Ann Arbor, Michigan company, manufactures smart sensors 
and sensor networks that automate water testing, data collection, and analysis 
for both drinking and industrial applications. 

The Sensicore Water Point 870 (WP 870), lab-on-chip micro-sensor array tech¬ 
nology, is used to chemically profile drinking water (and/or other liquids) for 
municipal and industrial applications. This hand-held system is capable of meas¬ 
uring and calculating 19 different water parameters in 6 minutes. Key water 
quality tests that the WP 870 can perform include measurements for pH, Free 
Chlorine, Total Chlorine, Ammonia, Total Dissolved Solids, Calcium Hardness, and 
other water parameters. The Water Point system enables municipalities and 
industrial customers to monitor their water in real-time, helps them pinpoint the 
extent of contamination quickly and efficiently, and allows users to perform post¬ 
event monitoring while still the field. 

From April through July 2007, the WP870 was tested by the EPA Environmental 
Technology Verification (ETV) Program evaluating the following parameters: 
accuracy—comparison to results from standard laboratory water reference 
analyses; precision—repeatability from sample replicates analyzed on the same 
day; inter-unit reproducibility—comparison of results from two identical sensors 
and handheld units; field portability—operation during remote field site analysis; 
and ease of use—general operation, data acquisition, set-up, consumables used, 
and purchase and operational costs. In September 2007, EPA released its ETV 
Report on the Sensicore WP870. The report is available on line at 
http://www.epa.gov/etv/pubs/ vrSensicoreWS.pdf. 

Sensicore was founded in November 2000, in partnership with researchers 
from the University of Michigan, to explore new applications for solid-state sen¬ 
sors. The initial goal was to create a means of liquid profiling that took full advan¬ 
tage of sensor technology and emphasized greater convenience and ease of 
use than traditional methods. 

By the end of 2003, the company met its first major challenge with the devel¬ 
opment of a disposable micro-sensor that was cost effective and easy to 
replace. Based on this success, the company assembled a broader team of inter¬ 
national water industry experts to apply sensor technology in a commercially 
viable product. Water POINT™, a hand-held device for point source water test¬ 
ing, was launched nationally in the first quarter of 2005. In March 2006, Sensicore 
announced the availability of the WP870, its second generation hand-held water 
testing system. 

Sensicore is supported by a group of Venture Capital organizations including: 
NGEN Partners, Santa Barbara, California; Aridest, Ann Arbor, Michigan; Capital 
Management, Palo Alto, California; Technology Partners, Palo Alto, California; 
and Topspin Partners, Roslyn Heights, New York. 


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Soliant Energy 

www.soliant-energy. com 

"Using Government Grants to Augment Venture Capital Investment in 
Clean Technology" 

RockPort Capital Partners 

Soliant Energy in Pasadena, California, designs and manufactures concentra¬ 
tor photovoltaic modules for grid-tied and off-grid, residential and commercial 
uses. Soliant was founded in 2005 and aims to achieve grid-cost electricity via 
photovoltaic modules by 2010. Soliant's product platform, the Heliotube™ con¬ 
centrating solar panel, addresses the strong market need for lower-cost, higher- 
power solutions for rooftop solar power. 

In contrast to the other photovoltaic concentrator modules on the market 
today, the Heliotube panel includes concentration and solar tracking within the 
traditional form factor of a 4' x 6' solar panel. Heliotube's integrated tracking 
mechanism provides more uniform power output than traditional flat panels and 
eliminates the substantial efficiency losses associated with fixed low-concentra¬ 
tion modules. In addition, the Heliotube tracking system is self powered and 
plug-compatible with conventional "flat plate" x-Si products. As a plug-compati¬ 
ble alternative to standard solar panels. Heliotube conforms to the existing stan¬ 
dards and practices of the large, established channels of solar installers, integra¬ 
tors, project managers, dealers, and distributors. 

In March 2007, Soliant Energy (previously Practical Instruments) was awarded 
a $4 million grant from the U.S. Department of Energy (DOE) Solar America 
Initiative (SAI). The DOE SAI grant will allow the company to accelerate develop¬ 
ment of its Heliotube™ product platform. Soliant's project partners in the SAI 
award included: Spectrolab, the DOE Sandia National Laboratory, SunEdison, 
and the Massachusetts Institute of Technology. 

Soliant's DOE SAI award is expected to allow the company access to more 
private equity support if needed in its photovoltaic product line development. 
Currently, Soliant is funded by leading energy and renewable technology 
investors, including RockPort Capital, Trinity Ventures, Nth Power, Silicon Valley 
Bank, and Rincon Venture Partners. A RockPort Capital General Partner serves 
on the Board of Directors of Soliant Energy. 


212 Resources 

www. 212resources. com 

"Securing Long-Term Debt Financing for an Environmental Technology" 
@Ventures 

The focus of ©Ventures' current fund, formed in 2004, is on investments in the 
cleantech sector, including alternative energy, energy storage and efficiency, 
and water purification technologies. In early 2007, ©Ventures made a $3 million 
investment in 212 Resources (formerly H20il Recovery Services), a natural 




resource recovery company specializing in the reclamation of valuable hydro¬ 
carbons and fresh water from oil and gas exploration and production processes. 

In September 2007, @ Ventures helped 212 Resources secure a $250 million 
credit line from GE Financial Services to help the company expand its technology 
applications in the oil and gas industry. 

As part of the GE Services credit, an initial $27.5 million of equipment and 
working capital financing will allow the company to commence processing and 
recycling oilfield wastewater into clean water for reuse in drilling operations at 
the Pinedale Anticline, the nation's second-largest natural gas field. This facility 
will allow the company the flexibility to expand its services to protect environ¬ 
mentally sensitive wilderness areas. 

The 212 Resources company name reflects the "resource recovery opportuni¬ 
ties at the boiling point of water (212°F)" and how the company focuses on help¬ 
ing to address one the world's most serious problems—water conservation. 

The 212 Resources' well-site service enables oil and gas companies to devel¬ 
op reserves, reclaim and purify water, and add incremental revenue by enhanc¬ 
ing hydrocarbon recovery. The company employs a patented vapor compres¬ 
sion flash evaporation system that separates 

wastewater generated by oil and natural gas exploration and production 
into clean water, brine, methanol, and natural gas condensate. 

Recovering valuable byproducts, while generating clean water, allows the oil 
and natural gas industry to lower its water management costs. In addition to pro¬ 
tecting fresh water aquifers in production fields, the negative environmental 
impacts of trucking and impounding wastewater are reduced. The company 
has several plants in Wyoming under construction to treat more than 9,000 barrels 
of water per day at different oil and gas sites. 


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Appendix H: Understanding the Environmental Impact of 

Clean Energy and Other Technology 
Investments: Environmental Capital Group’s 
Environmental Due Diligence Process 


Clean Energy and Technology Investments 

Clean energy and technology investments include those that provide eco¬ 
nomic value while improving the sustainable use of natural resources and reduc¬ 
ing waste and emissions as compared to existing products, services, or technolo¬ 
gies. This includes alternative and renewable energy (clean energy), water tech¬ 
nologies (clean water), advanced materials or nanotechnology (clean material), 
air purification technologies (clean air), and transitional infrastructure opportuni¬ 
ties. Environmental Capital Group (ECG) provides environmental due diligence, 
performance monitoring, and reporting services that account for the real envi¬ 
ronmental impacts created by the private equity investments in clean energy 
and technology. 

Environmental Due Diligence 

The purpose of environmental due diligence is to answer two key questions: 

1. If the technologies of the portfolio companies are successfully commer¬ 
cialized, will the fund result in significant net environmental benefits? 

2. Does the fund management have the capability and willingness to imple¬ 
ment its environmental strategy and measure the resultant environmental 
benefits? 

Each candidate fund responds to a set of questions about the fund's poten¬ 
tial environmental benefits, environmental strategy, prior experience in environ¬ 
mental investments, environmental and technical expertise, and experience and 
knowledge of measurement of environmental results. For a fund to be recom¬ 
mended, it has to meet expectations according to specific criteria in each of the 
following categories: 

■ Priority and scope of environmental problems addressed. 

■ Magnitude of potential environmental benefits. 

■ Environmental strategy of fund. 

■ Likely environmental performance of fund. 

■ Management team environmental experience. 

■ Environmental performance monitoring capability. 

Successful Investment Proposals 

The most successful investment proposals have the following characteristics: 

■ The prospective portfolio companies are likely to result in significant envi¬ 
ronmental benefits because of the potential for breakthrough technolo¬ 
gies and/or because the technology might be transferred to multiple 
companies. 

■ The fund management demonstrates an understanding of: a) the envi¬ 
ronmental problems that it will address, b) the importance of considering 
positive and negative environmental impacts, c) the legal/regulatory 
environment, and d) the need to have a plan to commercialize tech¬ 
nologies to achieve actual environmental benefits. 


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■ The proposal explicitly describes how the fund management will consider 
the potential environmental impact prior to selection of portfolio compa¬ 
nies, in addition to financial considerations. 

The fund management includes people with sufficient technical depth and 
willingness to undertake a quantitative analysis of net environmental benefits of 
its portfolio companies. 

Net Environmental Benefits 

ECG has developed analytical methods to measure and report significant 
net environmental benefits created by the portfolio companies. To analyze net 
environmental benefits, we consider how the "new" process or product com¬ 
pares to the "existing" process or product. This requires an understanding of not 
only the environmental impacts of the company's technology, but also of the 
technology that it seeks to replace. It also requires establishing the boundaries of 
the analysis and considering significant positive and negative environmental 
impacts within those boundaries. For example, when analyzing how an electric 
car benefits the environment, we must first answer the question: "Compared to 
what?" Usually, the comparison is made to the industry standard or typically-used 
product, which we call the "base case". We must then address the question of 
how the new technology compares environmentally to the base case, both posi¬ 
tively and negatively. The diagram below shows potential sources of environmen¬ 
tal benefits relating to consumption of energy and raw materials and manufac¬ 
ture of product and by-products. 



1. Product Raw Materials; The technology may require either a smaller 
amount of raw material or a more environmentally benign raw material to 
achieve the same result compared to the industry-standard (e.g„ a man¬ 
ufacturing process that recycles by-products to be used as raw material). 

2. Energy Raw Materials: The energy used to make the raw materials 
(embodied energy) or to convert the raw materials to the final product 
(process energy) may be from a renewable energy source instead of a 
fossil carbon energy source (e.g., liquid fuels produced from agricultural 
waste). 


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3. Manufacturing or Energy-Production Process: The technology may 
improve the efficiency of a manufacturing or energy-production process 
so that less energy is consumed (e.g., energy storage devices that allow 
for load-shifting and improved efficiencies in power plants). 

4. Product Functionality The product itself may be more environmentally 
benign than the product it replaces (e.g., a less toxic insecticide). 

5. The technology may result in fewer by-products 
or emissions (air, water, and/or land) compared to the industry-standard 
(e.g., a cleaner burning coal). 

All five of these areas must be considered in an analysis of net environmental 
benefits and are usually linked. Consider solar energy as an example. The prod¬ 
uct functionality is electrical power, which is similar to that produced from tradi¬ 
tional sources, but with significantly less by-products because the absence of 
combustion to produce the electricity also means the absence of greenhouse 
gas and other air emissions. In addition, the energy raw material (the sun) is 
renewable, so fossil carbon resources aren't depleted. However, the solar panels 
are manufactured from product raw materials that consume energy to produce 
(embodied energy, which may be fossil carbon based and which will vary in 
amount and type depending on the panel technology employed). The amount 
of energy produced in the energy-production process will also depend on the 
technology employed. 

Clearly, the extent of conducting such an analysis depends upon the detail 
in which each area is considered (do you count the energy required to make the 
machinery for a manufacturing process?) and the boundaries selected for the 
analysis (do you count the fuel burned by the workers driving to an ethanol 
plant?). This process has to be mindful of the costs associated with capturing and 
accounting for the net environmental benefits. Toward this end, ECG considers 
only those elements that significantly affected the results compared to the base 
case, what we call the "80/20 rule". For example, for a portfolio company pro¬ 
ducing a new building insulation product from recycled materials, we included 
the savings in product raw material embodied energy because making the recy¬ 
cle-based product required at least 20% less fossil carbon-based raw materials 
than making the traditional material. We also included the difference in product 
functionality (insulating capability) because the insulating capability of the recy¬ 
cle-based product was at least 20% better than the traditional material, resulting 
in building energy savings and reducing associated air emission by-products. We 
did not go to the detail of comparing the embodied energy of the machinery 
used to produce the recycle-based and traditional products. In most cases, we 
only considered the direct raw materials and energy used in the manufacturing 
process and the direct emissions from the process, not raw materials, energy and 
emissions further downstream or upstream. As we follow these companies over 
the investment period, we will continue to check if we are capturing all the 
material net environmental benefits. 

Another example of our approach is small-scale wind-powered electricity 
generation. These wind turbines are sold throughout the US. We selected as a 
base case the production of electricity from all sources in the US (natural gas, 
coal, nuclear, etc.) and assumed that any power generated from the wind tur¬ 
bines would displace power generated from a weighted average of these 
sources. We then calculated the total amount of power displaced and an asso¬ 
ciated reduction in air emissions (e.g., C0 2 , NO x , SO x , Hg) based on the weight¬ 
ed average emissions from all sources. This is obviously an approximation. If we 
could determine exactly where each wind turbine was installed, we could identi- 

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fy whether it was replacing natural gas-based power or coal-based power, 
which have different emission profiles, but this is beyond the scope of our analysis 
(and data available). We also did not include the energy required to make the 
turbines. In other cases, such as photovoltaic-based solar power, the embodied 
energy in the solar panels varies significantly between technologies and is signifi¬ 
cant compared to the energy produced by the panels. As such, it is included in 
our calculations. 

A defensible analysis of net environmental benefits must include considera¬ 
tion of significant negative environmental impacts. There is a difference in net 
greenhouse gas emissions (CO 2 ) between growing crops in an empty field to 
feed an ethanol plant and cutting down a rain forest to make room for such 
crops. In fact, the analysis of the net environmental impact of biofuels depends 
on careful consideration of each element in the model (raw materials, process 
energy type and requirements, end-product functionality, by-products, etc.). 

Environmental Performance Reporting System 

To move from concepts about environmental benefits to specific results for 
each portfolio company, ECG developed an Environmental Performance 
Reporting System (EPRS). The objectives of this system are to: 

1. Measure the net environmental benefits of each fund and portfolio com¬ 
pany investment; and 

2. Establish an environmental performance basis for proactively choosing 
future clean energy and technology investments. 

The first step in this process takes place upon the initial investment in each 
portfolio company. During due diligence, the General Partner of the fund identi¬ 
fies the significant environmental impacts of each company and determines 
whether they are consistent with the overall environmental objectives of the fund. 
Within 90 days of the initial investment, the General Partner establishes an envi¬ 
ronmental performance framework for each portfolio company, including select¬ 
ing the appropriate base case and preparing a sample net environmental bene¬ 
fit calculation. 

The calculation of net environmental benefits can be thought of as an engi¬ 
neering or technical report that links a business result, such as the number of 
product units sold or amount of material processed, to the associated environ¬ 
mental result, such as tons of emissions avoided or gallons of water saved. ECG 
works with the General Partner to conduct this analysis, including assessing which 
environmental impacts should be included, identifying respected literature 
sources, and checking the analysis for consistency with similar technologies 
based on our broad understanding of the market. In some cases, the analysis is 
reviewed with an expert in the appropriate field. 

At the end of each fiscal year, the General Partner collects business results 
data from each portfolio company and calculates the associated net environ¬ 
mental benefits using the analysis framework established at the time of invest¬ 
ment. ECG collects and reviews this information and works with the General 
Partner to update and refine the analysis framework. 







Definitions 


To facilitate discussion of these environmental impacts, we established a set 
of definitions as follow. 

“Environmental performance (or impact)” 

The effects a company's operations and activities have on the natural envi¬ 
ronment in terms of resource consumption, emissions, effluent, waste, biodiversity, 
and other aspects of ecosystem quality. 

“Direct environmental impact” 

The effects on the natural environment that directly result from a company's 
operations or product manufacturing, usage and disposal. 

“Indirect environmental impact” 

The effects on the natural environment as a secondary result of the compa¬ 
ny's technology and activities, such as improvement in the environmental per¬ 
formance of its suppliers or customers. 

“Environmental performance indicator” 

A measure of environmental performance used to monitor that performance 
over time. Example indicators might be pounds of materials recycled, gallons of 
water saved, tons of emissions avoided, etc. per unit sold, produced, or installed. 

“Sustainability” 

Meeting the needs of the present without compromising the ability of future 
generations to meet their own needs. 

“Base case scenario” 

The assumptions about the environmental impacts that would have hap¬ 
pened in the absence of the portfolio company's existence. Often the industry 
standard will serve as the base case scenario. 

“Net environmental benefits” 

Improvements in the absolute sustainability or quality of the natural environ¬ 
ment as a result of a company's environmental performance. This is obtained by 
considering both positive and negative changes to environmental systems that 
result from a company's products, by-products and technologies, above and 
beyond the base case scenario. 


0 





Appendix I: List of Acronyms 


ANL 

BACT 

BRAC 

CAA 

CalEPA 

CalPERS 

Ceres 

CPUC 

CRADAs 

DEP 

DOD 

DOE 

E2 

ECG 

EERE 

EFAB 

EIR 

EISA 

EPA 

EPAct 

EPRS 

ETV 

FSU 

IETO 

INL 

IPR 

ITA 

IVP 

LEEDS 

LLNL 

MIT 

NACEPT 

NASBIC 

NASVF 

NRDC 

NREL 

NRMRL 

OETD 

ORNL 

PNNL 

RFS 

ROI 

RTA 

SACERS 

SBA 

SBICs 

SBIR 

SEMATECH 

SESARM 

SETO 

TRI 

USDA 


Argonne National Laboratory 
Best Available Control Technology 
Base Realignment and Closure 
Clean Air Act 

California Environmental Protection Agency 

California Public Employees' Retirement System 

Coalition for Environmentally Responsible Economies 

California Public Utilities Commission 

Cooperative Research and Development Agreements 

Department of Environmental Protection 

U.S. Department of Defense 

U.S. Department of Energy 

Environmental Entrepreneurs 

Environmental Capital Group 

Energy Efficiency and Renewable Energy 

Environmental Financial Advisory Board 

Entrepreneur-in-Residence 

Energy Independence and Security Act of 2007 

U.S. Environmental Protection Agency 

Energy Policy Act of 2005 

Environmental Performance Reporting System 

Environmental Technology Verification 

Fresno State University 

Interagency Environmental Technologies Office 
Idaho National Laboratory 
Intellectual Property Rights 
International Trade Administration 
Innovation Valley Partners 
Leadership in Energy and Environmental Designs 
Lawrence Livermore National Laboratory 
Massachusetts Institute of Technology 

National Advisory Council for Environmental Policy and Technology 

National Association of Small Business Investment Companies 

National Association of Seed and Venture Funds 

Natural Resources Defense Council 

National Renewable Energy Laboratory 

National Risk Management Research Laboratory 

Office of Energy and Technology Deployment 

Oak Ridge National Laboratory 

Pacific Northwest National Laboratory 

Renewable Fuel Standard 

Return on investment 

Regional Technology Advocate 

Sacramento County Employees' Retirement System 

U.S. Small Business Administration 

Small Business Investment Companies 

Small Business Innovation Research 

SEmiconductor MAnufacturing TECHnology 

Southeastern States Air Resource Managers, Inc. 

Senior Environmental Technology Officer 

Toxics Release Inventory 

U.S. Department of Agriculture 

O 






Appendix J: References 


Deloitte & Touche Press Release. "Percentage of U.S. Venture Capitalist Investing 
Globally Lower Than Expected," July 11, 2007. 

Jones M, Berry J. "Earth, Wind and Fire: A Cleantech Perspective." Silicon Valley 
Bank Alliant, April 2007. 

National Advisory Council for Environmental Policy and Technology (NACEPT). 
"EPA Technology Programs and Intra-Agency Coordination," Washington, DC. 
May 2006. 

National Advisory Council for Environmental Policy and Technology (NACEPT). 
"EPA Technology Programs: Engaging the Marketplace." Washington, DC. May 
2007. 

National Association of Seed and Venture Funds. "Seed and Venture Capital: 
State Experiences and Options." May 2006. 

National Science and Technology Council, Interagency Environmental 
Technologies Office. "Bridge to a Sustainable Future: National Environmental 
Technology Strategy." Washington, DC, 1995. 

National Venture Capital Association and PricewaterhouseCoopers. "Venture 
Capital Investment Volume in Q2 2007 at the Highest Level Since 2001." August 7, 
2007. 

Parker N. Presentation at the U.S. Environmental Protection Agency, Office of 
Research and Development, National Risk Management Research Laboratory, 
Clean Water Partnership Summit, Cincinnati, OH. "Cleantech in 2007: An Industry 
Emerges," Cleantech Group, LLC, September 5, 2007. 

Paterson A. Environmental Business Journal Data. Presented at the Environmental 
Industry Summit, Coronado, CA. February 20, 2008. 

Stack J, Balbach J, Epstein B, Hanggi T. "CleanTech Venture Capital: How Public 
Policy Has Stimulated Private Investment." Environmental Entrepreneurs and the 
Cleantech Group, LLC. 2007. 

U.S. Department of Commerce, International Trade Administration. 

"Environmental Industries Facts." Washington, DC. 2007. 

U.S. Environmental Protection Agency. 2006-2011 Strategic Plan: Charting Our 
Course. EPA-190-R-06-001, Washington, DC, 2006. 

U.S. Environmental Protection Agency. "Venture Capital Support for 
Environmental Technology: A Resource Guide. Prepared by The Scientific 
Consulting Group, Inc., under EPA Contract No. EP-C-05-015, December 2007 
(Draft). 















































